SME Finance Policy Guide

SME Finance Policy Guide 

October 2011

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G-20 SME FINANCE POLICY GUIDE 

1 

Table of Contents 

List of Abbreviations 3 

Acknowledgements 4 

Introduction, Context 5 

A. Policy Guide: Objectives, Application 7 

B. Access to Finance for SMEs in Least Developed Countries (LDCs) 9 

C. Policy Guide Components 10 

Strategic Approach 10 

C.1. Regulatory and Supervisory Frameworks 14 

C.1.1. Role of Regulators 14 

C.1.2: Basel II/III and SME Finance 18 

C.1.3: Enabling Regulatory Frameworks for Alternative SME Finance Products: Leasing, Factoring 20 

C.1.4. Competition 22 

C.2. Financial Infrastructure 25 

C.2.1. Secured Transactions 26 

C.2.2. Insolvency Regimes 29 

C.2.3: Credit Information Systems 31 

C.2.4: Payment Systems 36 

C.2.5: Equity Investment 39 

C.2.6: Accounting and Auditing Standards for SMEs 44 

C.3 Public Sector Interventions 48 

C.3.1: State Banks 49 

C.3.2: Apexes and Other Wholesale Funding Facilities 52 

C.3.3 Partial Credit Guarantee Schemes 55 

C.3.4 Government Procurement from SMEs 59 

C.3.5: SME Capacity, Creditworthiness 61 

C.4: Women and SME Finance 66 

C.5: Agrifinance for SMEs 68

2 GLOBAL PARTNERSHIP FOR FINANCIAL INCLUSION 

D. Recommendations 73 

D.1. Regulatory and Supervisory Frameworks 73 

D.2 Financial Infrastructure 75 

D.3 Public Sector Interventions 77 

D4: Women and SME Finance 79 

D.5: Agrifinance and SMEs 79 

Annex I: Access to Finance for SMEs in LDCs 81 

Annex II: Abatement Curve Model 86 

Annex III: World Bank General Principles for Credit Reporting 89 

Annex IV. Least Developed Countries 91 

Annex V: Resources, References 92


3 

List of Abbreviations 

AIM 

AML 

ATMs 

BCBS 

BDC 

BPR 

CBS 

CCRIS 

CEDAW 

CFT 

CGAP 

CPM 

CPSS 

DCA 

DFI 

DLL 

EBRD 

ECA 

EFTPOS 

EPCGF 

EU 

FICA 

FIEG 

FINEP 

FIs 

FOGAPE 

GEM 

GPFI 

GTIP 

IAS 

IASB 

IFC 

IFRS 

ILO 

Alternative Investment Market 

Anti-Money Laundering 

Automated Teller Machines 

Basel Committee on Banking Supervision 

Development Bank of Canada 

Banques Populaires Régionales 

Credit Bureau Singapore 

Central Credit Reference Information 

System 

Convention on the Elimination of All Forms 

of Discrimination against Women 

Combating the Financing of Terrorism 

Consultative Group to Assist the Poor 

Crédit Populaire du Maroc 

Committee on Payments and Settlement 

Systems 

Development Credit Authority 

Development Finance Institution 

Banco De Lage Landen 

European Bank for Reconstruction and 

Development 

Europe and Central Asia 

Electronic Funds Transfer at Point of Sale 

European-Palestinian Credit Guarantee 

Fund 

European Union 

Financial Intelligence Centre Act 

Financial Inclusion Experts Group 

Financiadora de Estudos e Projetos 

Financial Institutions 

Fondo de Garantia para Pequeños 

Empresarios 

Growth Enterprises Market 

G-20 Global Partnership for Financial 

Inclusion 

Global Technology and Innovation Partners 

International Accounting Standard 

International Accounting Standards Board 

International Finance Corporation 

International Financial Reporting Standards 

International Labour Organization 

JSE 

KVIC 

LDCs 

LGD 

MENA 

MICs 

MSE 

MSMEs 

NAFIN 

NBFI 

NGO 

OECD 

OHADA 

PCGs 

PCRs 

PD 

PE 

POs 

R&D 

ROSC 

SARA 

SGB 

SIYB 

SMERA 

SMEs 

TEB 

UNCTAD 

-ISAR 

Johannesburg Stock Exchange 

Korea Venture Capital Investment Corp 

Least Developed Countries 

Loss Given Default 

Middle East and North Africa 

Middle-Income Countries 

Micro or Small Enterprise 

Micro, Small, and Medium Enterprises 

Nacional Financiera 

Non-bank Financial Institutions 

Non-Government Organization 

Organization for Economic Co-Operation 

and Development 

Organisation pour l’Harmonisation en 

Afrique du Droit des Affaires 

Partial Credit Guarantee 

Public Credit Registries 

Probability of Default 

Private Equity 

Partner Organizations 

Research and Development 

Reports on the Observance of Standards 

and Codes 

South Asia Regional Apex Fund 

Small and Growing Businesses 

Start and Improve Your Business 

SME Rating Agency of India 

Small and Medium Enterprises 

Turk Economici Bank 

United Nations Conference for Trade and 

Development’s Intergovernmental 

Working Group of Experts on 

International Standards of Accounting and 

Reporting 

UNCITRAL United Nations Commission on 

International Trade Law 

UNIDROIT International Institute for the Unification of 

Private Law 

USAID 

VC 

WIN 

United States Agency for International 

Development 

Venture Capital 

Women in Business


Acknowledgements 

International Finance Corporation (IFC) is the lead technical advisor to the G-20 Global Partnership for 

Financial Inclusion’s (GPFI) SME Finance Sub-Group. This report was produced by IFC on behalf of the 

GPFI. The GPFI is the main platform for implementation of the G-20 Financial Inclusion Action Plan. The 

group engages partners from G-20 and non-G-20 countries, private sector, civil society, and others. It is 

chaired by the G-20 troika countries, currently Korea, France, and Mexico. The GPFI is supported by 

three implementing partners: the Alliance for Financial Inclusion (AFI), the Consultative Group to Assist 

the Poor (CGAP), and International Finance Corporation (IFC). www.gpfi.org 

This “SME Finance Policy Guide” was developed under the overall guidance of Peer Stein (IFC), Aysen 

Kulakoglu (Treasury of Turkey) and Susanne Dorasil (Federal Ministry for Economic Cooperation and 

Development, Germany). The working group for the report was led by Ghada Teima (IFC), with Douglas 

Pearce as lead author (World Bank), Diego Sourrouille (World Bank), Teymour Abdel Aziz (World Bank), 

Ina Hoxha (World Bank). 

IFC, World Bank, and CGAP policy experts that contributed to the Policy Guide include: Alejandro 

Alvarez de la Campa, Riadh Naouar, Maria Soledad Martinez Peria, Mahesh Uttamchandani, Massimo 

Cirasino, Antony Lythgoe, Roberto Rocha, Katia D’Hulster and Valeria Salomao Garcia, Kabir Kumar, 

Leora Klapper, Alex Berg, Heinz Rudolph, Eric Duflos, Chris Bold, Alan David Johnson, Bikki Randhawa, 

Nina Bilandzic, Marieme Dassanou, Panayotis Varangis. 

The Organisation for Economic Co-Operation and Development (OECD) provided access to its Small 

and Medium Enterprises (SME) finance literature. The Overseas Development Institute also provided 

drafting inputs to the report. 

The team would like to thank the peer reviewers for their valuable and substantive comments, in particular 

Roberto Rocha (World Bank) and Thorsten Beck (Professor of Economics, Tilburg University). 

This work was completed under the leadership of the co-chairs of the G-20 SME finance sub-group: 

Susanne Dorasil (Germany), Anuradha Bajaj (United Kingdom), Aysen Kulakoglu (Turkey), and Christopher 

Grewe (United States).


5 

Introduction, Context 

G-20 and the Global Partnership for Financial Inclusion 

The G-20 leaders first committed to improving access to financial services for the poor at their September, 

2009, meeting in Pittsburgh. A Financial Inclusion Experts Group (FIEG) was convened to expand access 

to finance for household consumers and micro, small- and medium-sized enterprises (MSMEs). The G-20 

Global Partnership for Financial Inclusion (GPFI) was launched in South Korea in December, 2010. The 

establishment of the GPFI institutionalized the work by FIEG beyond the Seoul Summit and elevated 

financial inclusion to a permanent priority within the G-20. 

The SME Finance sub-group produced the stocktaking report “Scaling Up SME Access to Financial 

Services in the Developing World” in 2010. The report included 164 case studies and made policy recommendations 

in three areas: (1) legislation, regulation, and supervision; (2) financial market infrastructure; 

and (3) public intervention and support mechanisms. The G-20 SME Finance Task Group, with the support 

of development agencies and private sector players, committed to support the development and 

implementation of these SME Finance policy recommendations, through a SME Finance Policy Guide. 

A draft Policy Guide for SME Finance has therefore been prepared by the SME Finance sub-group, cochaired 

by Germany, Turkey, the United Kingdom, and the United States, with writing and analysis led by the 

IFC and World Bank, building on the 2010 stocktaking report and informed by further research, consultations, 

and expert inputs. This Policy Guide therefore provides a comprehensive set of good practice policy 

measures, recommendations, standards and guidelines, lessons learned, and example models. 

SME Finance Stocktaking Report, 2010 

The G-20 SME Finance sub-group worked to identify and scale up successful models and policy measures 

for small and medium sized enterprise (SME) financing through a global stocktaking exercise in 2010. The 

sub-group collected 164 models of SME finance interventions, covering legal and regulatory approaches, 

financial Infrastructure improvements, public support schemes, and private sector initiatives. 

On the basis of the key lessons learned from the 2010 stocktaking exercise, the following recommendations 

were set out in the report “Scaling Up SME Financing in the Developing World” for establishing an 

enabling environment for SME access to financial services: 

i) Developing country specific diagnostics and strategies;


ii) 

Developing a supportive legal and regulatory framework; 

iii) 

Strengthening the financial infrastructure; 

iv) 

Designing effective government support mechanisms; 

v) Building consistent and reliable data sources on SME finance; and 

vi) 

Building capacity of the financial institutions. 

These recommendations are developed here into a Policy Guide, with a focus on policy and regulatory 

measures. Accepted guidelines and standards are set out, supplemented by examples, models, and 

diagnostics. Further stock-taking of SME finance models was conducted to deepen insights into the 

most relevant models, and to try to identify models for all areas of the Policy Guide. 

Consultations 

A consultative process was fundamental in the development of this Policy Guide. A consultation event 

“SME Finance, G20 and LDCs: Policy Guide, Challenges and What Works” took place on May 10, 2011, 

with representatives from LDCs, governments, research institutes, investors, banks, and others, as a side 

event to the Fourth United Nations Conference on Least Developed Countries in Istanbul. Representatives 

from LDCs, G-20 countries, international organizations, the private sector, non-governmental organizations 

(NGOs), academics, and media participated. Consultation briefs for Policy Guide themes and subthemes 

were then posted online, together with relevant background documents, for open “virtual” 

consultations between May 31 and June 24, 2011. The subgroup invited more than 1,000 SME finance 

experts, practitioners, academics, government officials, regulators, and NGO representatives to join the 

consultations.


7 

CHAPTER A 

Policy Guide: 

Objectives, Application 

The objective of this Policy Guide is to refine and 

develop the policy recommendations endorsed by G-20 

leaders in Seoul in 2010, to take further account of the 

challenges developing countries face, and to produce a 

more detailed Policy Guide to guide and support the 

implementation of SME Finance reforms. The Policy 

Guide is intended as a guide and reference point for governments 

and regulators, providing a roadmap for planning, 

assessing, and implementing policy and legal 

measures to support SME access to finance. 

The draft Policy Guide sets out models and accepted or 

emerging good practice for policy and legal reforms 

and public interventions to support SME Finance. As 

such, it can underpin the development of country 

action plans and national strategies to improve SME 

access to finance. Given the mixed results achieved by 

SME Finance policies, reforms, and interventions in 

many countries, the Policy Guide incorporates lessons 

learned, outlines good practice models, and places 

each Policy Guide component in the context of the 

issues that it can address, thus offering the potential 

for tailored, more cost-effective, and higher-impact 

reforms and interventions. 

In line with the guidance received from the G-20 SME 

Finance co-chairs, there is a focus on Least Developed 

Countries (LDCs) 1 running through the Policy Guide, 

including the challenges that LDCs face in supporting 

SME finance, along with relevant models and recommendations. 

The challenges faced by the Middle East 

and North Africa region, including job creation and 

widening of economic opportunities, also informed 

the scope of the Guide as requested by the GPFI cochairs, 

with guidance and models provided for public 

interventions (such as state banks, guarantee funds, 

apex funds), and a set of policy analysis and recommendations 

on measures to increase the creditworthiness 

and competitiveness of SMEs. 

The Policy Guide will be presented in draft to the G-20 

leaders at the Cannes Summit in November 2011. 

Sequencing, Prioritization 

The Policy Guide presented in this paper provides a 

comprehensive menu of interventions to support 

improved access to finance for SMEs. The significance 

of market failures, regulatory constraints, 

supervisory weaknesses, financial infrastructure 

deficiencies, and financial institution capacity and 

behavior, will vary by country and context. 

Therefore, diagnostic assessments are necessary as a 

first step to inform the selection and sequencing of 

tools from this Guide. 2 

The capacity of government to implement reforms, of 

regulators to effectively introduce and supervise new 

or reformed regulations, and of the financial sector to 

respond to an improved enabling environment, will 

also vary. LDCs in particular may be relatively constrained 

in terms of human, institutional, and fiscal 

resources to support comprehensive reform programs, 

and may need to carefully sequence SME Finance 

1 LDC definition and country list in Annex IV. 

2 The SME Finance Abatement model is outlined in Annex II. The purpose of the model is to provide a basis on which to calibrate the 

effectiveness of policy interventions in a country, by first quantifying the SME finance gap, then determining which interventions should 

be targeted, and assessing the effectiveness and cost of implementing such policies to increase access to finance for SMEs.


policy guides. G-20 partners, including agencies such 

as the World Bank, IFC, regional development banks, 

and multilateral and bilateral donors, can play an 

important role in providing complementary resources 

to support LDC policy guides. 

An enabling regulatory framework and a supportive 

financial infrastructure are essential in the medium 

term to encourage sustainable, viable, and significant 

improvements in access to SME finance. However, in 

the short term, more direct public interventions may 

be merited, although these are not without risks in 

terms of market distortion, the optimal use of using 

public resources (and the associated opportunity cost), 

and perverse incentives to financial institutions and 

SMEs. Public interventions can also be counter-cyclical, 

as in the case of the recent global financial crisis, 

or can address more structural market failures. 

Data as a Priority 

The availability of relevant financial inclusion data is 

critical for informing the selection, prioritization, and 

sequencing of elements of the SME Finance Policy 

Guide set out in this document. The GPFI Data and 

Target Setting Sub-group identified the following set of 

gaps in the financial inclusion data landscape, which 

also merit an initial focus and subsidy on data collection 

mechanisms from an LDC perspective: 3 

i) Gaps related to statistical capacity are those that 

involve the way in which financial inclusion statistics 

are measured, collected, and disseminated in 

general. These are: 

• Some data sets, especially demand-side databases, 

are not publicly available. In some cases, this is 

because of confidentiality, in some others, 

because of transparency or private property. 

• Data and measurement on access to finance by 

households are more developed than those on 

access to finance by firms. 

• There is lack of data on informal providers and 

informal businesses, though it should be 

acknowledged that data on the informal sector 

are hard to gather in general. 

• Lack of financial identity weakens the reliability 

of supply-side data on usage. As users cannot be 

uniquely identified in forming country-level 

aggregates in the absence of financial identity, 

supply-side indicators on usage are prone to multiple 

counting. 

• Lack of harmonized definitions, standardized 

data collection and indicator construction— 

especially for SMEs, active vs. dormant accounts, 

and demand-side data—lead to challenges with 

comparability of indicators over time and across 

countries. 

ii) Gaps related to financial inclusion dimensions are 

those that concern input, output and impact indicators. 

These are: 

• Access and usage indicators that measure the 

entry into the formal financial system are reasonably 

well-developed, though there are certain 

gaps to be filled. For example, frequency of measurement 

of usage by enterprises and differentiation 

of active users need improvements. 

• Next generation output indicators such as quality 

of services, financial literacy, absence of barriers 

to access, etc. are yet to be developed in a consistent 

way. 

• Regular and thorough measurement of the key 

enabling environment—more specifically, public 

sector driven enablers and private sector drive— 

is lacking. 

3 Source: “Assessing the Financial Inclusion Data Landscape and the Foundation for Setting Country-Level Financial Inclusion Targets,” 

GPFI Data and Target Setting Sub-group, consultation draft as of September 2011.


9 

CHAPTER B 

Access To Finance For SMEs in 

Least Developed Countries (LDCs) 

SMEs play a key role in economic development and 

make an important contribution to employment and 

GDP. 4 Financial access is critical for SMEs’ growth and 

development. In their early stages of development, 

SMEs rely on internal sources of funding, including 

the owner’s savings, retained earnings, or funding 

through the sale of assets. As firms starts expanding, 

external sources become more important and their 

availability can determine the firms’ growth possibilities. 

External finance is positively and significantly 

associated with productivity. Conversely, financing 

from internal funds and other informal sources is 

often negatively associated with growth and firm 

performance. 5 

However, access to finance remains a key constraint to 

SME development, especially in emerging economies. 

Access to finance is disproportionately difficult for 

SMEs in LDCs, with 41 percent of SMEs in LDCs reporting 

access to finance as a major constraint to their 

growth and development, as compared with 30 percent 

in middle-income countries, and only 15 percent 

in high-income countries. 6 Access to finance through 

bank loans not only decreases with the level of country 

income, but also tends to be more concentrated among 

large borrowers. Other common sources of finance for 

SMEs, such as leasing and factoring, are not yet well 

developed in LDCs. Annex I presents a statistical overview 

of access to finance for SMEs in LDCs. 

LDCs stand to gain significantly from policy guides 

that support improved access to finance for SMEs. An 

impact evaluation by Banerjee, Abhijit, and Duflo in 

India in 2008, suggests that credit constraints for 

Indian SMEs were a leading reason for the productivity 

and investment gap between the United States and 

India. There is evidence that, in developing economies, 

SMEs could contribute more to economic development 

than they currently do. SMEs tend to be 

smaller in developing countries, suggesting greater 

constraints to growth, including financial constraints. 

Recent World Bank research 7 using a database for 99 

developing countries, found that small firms are 

important contributors to total employment and job 

creation, but that small firms also have lower productivity 

growth than large firms. In other words, while 

SMEs employ a large number of people and create 

more jobs, their contribution to productivity and 

growth is less clear. The authors concluded that growth 

and increases in productivity require a policy focus on 

the potential obstacles, which include constrained 

access to finance and encompass growth capital. 

However, LDCs can face a more severe set of challenges 

in providing enabling policy and legal frameworks 

for SME finance, relative to middle- and 

high-income countries that may have stronger institutional 

capacity and higher levels of access to finance. 

Financial infrastructure, such as credit information 

systems, payment systems, and secured transactions 

and insolvency frameworks, are generally weaker and 

less developed. LDCs may therefore need to prioritize, 

adapt, and sequence the Policy Guide components 

outlined in this paper. 

4 Ayyagari, Beck and Demirgüç-Kunt (2007) 

5 Beck, Thorsten, Asli Demirgüç-Kunt, and Ross Levine. 2005 

6 World Bank Enterprise Surveys. Numbers by income group are simple averages of all countries with data available that fall into the group. 

7 Ayyagari, Demirguc-Kunt, Maksimovic (2011)


CHAPTER C 

Policy Guide Components 

The Policy Guide covers regulatory and supervisory 

frameworks, financial infrastructure, and public interventions. 

In addition to the traditional role of ensuring 

the stability and efficiency of the overall financial system 

at large, regulators can contribute to greater access to 

finance by promoting a favorable legal and regulatory 

environment. Such an environment establishes the rules 

within which all the financial institutions, instruments, 

and markets operate in a given country. 

This legal and regulatory framework is complemented 

by a sound financial infrastructure, which improves 

the efficiency and effectiveness of financial intermediation. 

A sound payments system and a well-functioning 

credit information framework are two essential 

elements of a financial infrastructure. They are crucial 

to ensure the efficient functioning of financial systems, 

even in the presence of an otherwise flawless legal and 

regulatory framework. 

In addition to designing and enforcing an enabling 

regulatory environment and financial infrastructure, 

governments and regulators may choose to undertake 

more direct market interventions to promote SME 

finance. These can compensate for deficiencies in the 

enabling environment in the interim while reforms 

are implemented, or address residual market failures, 

such as enforcement difficulties, imperfect information, 

protection of depositors, and market power. They 

include capacity-building for SMEs to improve their 

creditworthiness, credit guarantee schemes, state 

banks and funds, and supply chain finance linked to 

public procurement and payments. 

Strategic Approach 

Country-level processes (diagnostics, consultations) are 

necessary to assess challenges, to identify policy and 

legal responses from this Policy Guide’s menu of options, 

and to determine lead roles, targets, prioritization, and 

sequencing. Analysis of the tools and options available, 

and the potential impact and cost-effectiveness of each, 

should be conducted before selecting and implementing 

policy reforms and interventions. 8 

Further work is 

needed on impact assessment techniques for SME 

Finance policies and interventions. 

Wider Policy Guide for SME Finance: 

Financial Inclusion Strategies 

Governments and regulators need to take the lead in 

supporting improvements in access to finance, displaying 

the leadership called for in the G-20 Principles for 

Innovative Financial Inclusion. Financial regulators and 

governments can add financial inclusion as a goal alongside 

prudential regulation and financial system stability, 

and develop financial inclusion strategies. The 

Consultative Group to Assist the Poor (CGAP) and World 

Bank Financial Access survey (2010) of financial regulators 

worldwide found that regions that include financial 

access in their strategies and mandate their financial 

regulators to carry such agendas are also the countries 

that reform the most. Regulators with a financial inclusion 

strategy are more likely to have more financial 

inclusion topics under their purview, and more resources 

and staff dedicated to working on these matters. 

8 The IFC-commissioned SME Finance Abatement model offers a quantitative assessment framework for determining the potential 

benefits of reforms in reducing barriers to SME access to finance. See Annex II.


11 

Figure 1 Examples of Countries Advancing Full Financial Inclusion – 

including for SMEs 

INDIA 

■ Full Financial Inclusion 

government mandate 

■ Focus on full-scale banking 

and wide reach 

SOUTH KOREA 

■ Tax benefits for 

FIs and users 

■ Regulatory changes 

MEXICO 

■ Full Financial 

Inclusion by 2020 

vision 

■ Diconsagovernment 

trasfer 

partnership 

■ No-frills accounts 

required by 

regulation 

PERU 

■ Superintendency 

adopted FI as 

cross-cutting 

priority 

■ Focus on 

consumer 

protection and 

financial 

education 

BRAZIL 

■ Social transfer 

payments 

through agent 

banking 

KENYA 

■ National objective to 

expand access to millions 


■ M-Pesa 

SOUTH AFRICA 

■ Mzansi 

■ Wizzit 

■ MiniATM 

■ Financial Sector Charter 


PHILIPPINES 

■ Regulatory initiatives 

■ Mobile banking 

(GCASH, SMART 

money) 

■ Financial Literacy 

campaign 

Source: World Bank Group Team Analysis and AFI; Map represents selected examples only, not an exhaustive or best practice list of 

countries with full/universal financial inclusion initiatives. Note that the South Korea example dates back to the credit card lending 

boom in 1999-2002. 

Financial inclusion can be promoted through shared 

public and private sector goals, developed on the basis 

of improved market data on financial exclusion. 

Cooperation with the private sector and civil society (a 

G-20 Principle) is essential to achieve far-reaching 

improvements in financial inclusion. Private sector 

commitments, which may be backed by a threat of 

regulation or enforcement if the private sector is not 

sufficiently active in delivering them, can be an effective 

means of promoting financial inclusion and financial 

capability. Banks and MFIs can then take a leading 

role in promoting financial inclusion, spurred on by 

competition, the threat of regulation, and monitoring, 

and in line with market opportunities. 

Commitments by regulators and governments can 

complement private sector targets. Charters or codes of 

practice can serve as the basis for agreements and can 

set out the financial sector commitments to expanding 

access to financial services and to improving the terms 

of that access. Codes and charters can also encompass 

consumer education, transparency of information on 

products, services and tariff structures, complaint handling, 

and provision of secure and reliable banking 

and payment systems, backed up by regulations and 

enforcement where necessary. 

On the national level, governments are becoming 

increasingly more pro-active and some are incorporating 

financial inclusion, such as SME finance, and the 

drive to universal access into their national mandate 

(see Figure 1 for an illustrative map with selected 

country examples). Recent survey data indicates that at 

least one aspect of financial inclusion is under the purview 

of the financial regulators in 90 percent of the 

economies surveyed. Financial inclusion strategies are 

increasingly common. SME finance promotion is 

among the key financial inclusion elements that form


Table 1 Using Financial Inclusion Targets: Examples 

APPROACH 

1. Data underpins 

Reforms and 

Innovation 

2. Public and private 

sectors agree 

financial inclusion 

goals 

3. Public sector 

removes regulatory 

barriers and monitors 

progress on goals 

4. Private sector 

develops new 

financial services and 

delivery mechanisms 

South Africa: 

FinScope Data 

Financial Sector 

Financial Advisory 

Basic bank accounts 

Survey 

Charter 

and Intermediary 

and mobile phone 

Services Act, 

banking 

Dedicated Banks Bill 

UK: 

Family Resources 

Financial Inclusion 

Progress monitored 

Basic Bank Accounts, 

Survey 

Task Force 

by Financial Inclusion 

Financial services 

Indicators 

through Post Office 

Canada: 

Canadian Banking 

Financial Consumer 

Low cost bank 

Code 

Agency of Canada 

accounts 

India: 

Banking Codes and 

Reserve Bank of 

Basic bank accounts, 

Standards Board of 

India’s guidance on 

Innovative use of 

India 


technology to reach 

customers 

Source: Pearce & Bajaj, 2006. 

part of governments’ strategies or mandates. Other elements 

include: consumer protection, financial literacy, 

regulation of microfinance, savings promotion, and 

SME finance promotion. 9 

India has mandated financial inclusion as a national 

goal. The Reserve Bank of India has intensified a number 

of measures and endorsed quantitative access targets 

over the last year to further financial inclusion. The government 

of Mexico is welcoming and supporting ongoing 

financial inclusion programs and analytical work to 

advance the goal of full financial inclusion by 2020. 

South Africa has mobilized the public and private sectors 

to design products and interventions that serve as 

the entry-level point, to include a larger percentage of 

the unbanked in formal financial services (e.g., Mzansi 

accounts with no monthly fee and no minimum balance). 

Moreover, the United Nations committee on 

building inclusive financial sectors, set up in 2006, 

urged central banks and governments to add the goal of 

universal “financial inclusion” to the two traditional 

goals of prudential regulation: safety of depositors’ 

funds and the stability of the financial system. 10 

Country-level goals regarding financial inclusion 

have varied in their focus. Countries can choose 

whether to focus on a general goal or a specific target. 

In addition, goals and targets can be either general or 

specific to households or SME finance, depending on 

the level of development and prioritization each 

country determines most appropriate after conducting 

a systematic, data-driven diagnostic. An example 

of specific targets for SME access to finance is outlined 

in the box on page 13. 

Data to underpin SME Finance Policy 

Guides 11 

As a first step to developing country level action plans 

and targets, governments should emphasize improving 

9 CGAP and World Bank Group. “Financial Access” database. 

10 UN, “Building Inclusive Financial Sector for Development”, 2006, India, Mexico and South Africa examples based on public reports and 

publicly available information. Section excerpted from Randhawa et al. (2010). 

11 For further details, see the GPFI Data and Target Setting Sub-group report: “Assessing the Financial Inclusion Data Landscape and the 

Foundation for Setting Country-Level Financial Inclusion Targets,” GPFI Data and Target Setting Sub-group, consultation draft as of 

September 2011.


13 

SME Lending Targets in the United Kingdom 

In February 2011, the Merlin Agreement was established between the UK Government and the major UK banks – specifically 

Barclays, HSBC, LBG and RBS, and Santander - recognizing their responsibility to support economic recovery 

in the United Kingdom. The agreement sets lending targets of around £190 billion this year, including £76 billion 

to small firms. The Bank of England will monitor whether the loans targets are being met. This is part of a wider 

agreement that also includes curbs on bonuses and requirements to disclose salaries, and has been negotiated as a 

result of the banking sector bailout that occurred in the context of the crisis. 

The banks are also committed to implementing the recommendations of the UK Business Finance Taskforce (which 

also comprises Standard Chartered), in particular the following; 

i) Support a network of mentors from the banks, attached to existing mentoring organizations, to deliver a free finance 

service to small and medium sized businesses across the United Kingdom; 

ii) Improve service levels to micro enterprises through a new lending code; 

iii) Publish lending principles that clearly set out the minimum standards for medium-sized and larger businesses; 

iv) Establish transparent appeals processes for when loan applications are declined, with processes independently 

monitored by a senior independent reviewer, who will publish the results of their review; 

v) Initiate a pre re-financing dialogue 12 months ahead of any term loan coming to an end; 

vi) Establish and invest in a new £1.5 billion Business Growth Fund (built over a number of years); 

vii) Support the Enterprise Finance Guarantee Scheme; 

viii) Help mid-sized businesses access syndicated debt markets; 

ix) Improve access to trade finance; 

x) Signpost alternative sources of finance; 

xi) Fund and publish a regular independent survey on business finance demand and lending supply; 

xii) Enhance the cross-industry lending dataset by broadening the statistics on (among other things) lending to deprived 

areas and national and regional data on the provision of bank support to business start-ups 

xiii) Hold regional outreach events throughout 2011; 

xiv) Improve customer information including a review of literature and other materials (e.g., loan applications); and 

xv) Establish a Business Finance Round Table. 

Source: http://www.hm-treasury.gov.uk/d/bank_agreement_090211.pdf 

data availability and investing in regular collection and 

dissemination of reliable financial inclusion data. The 

focus of these data-related investments will vary by 

country, but overall recommended measures to 

improve the current data landscape on SME finance are 

the following: 

• Harmonize the definitions of the concepts to be 

measured to ensure comparability across countries 

and over time, to devise development strategies, and 

to adapt or design informed policies. This is especially 

important for data and measurement of access 

to finance by SMEs and women-owned SMEs. 12 

• Standardize data collection and indicator computation. 

The use of international concepts, classifications 

and methods promotes the transparency, 

consistency and efficiency of statistical systems. 

• Build or improve national statistical capacity to 

improve data availability and quality. 

• Improve data availability and quality with a focus on 

missing indicators including barriers to access, usage 

by enterprises, role of informal providers, etc. 

• Build consistent and reliable data sources for access 

to finance by agricultural SMEs. 13 

• Ensure open data access. 

12 Also see “Strengthening Access to Finance for Women-Owned SMEs in Developing Countries: Executive Summary for GPFI Report” 

prepared by IFC for the GPFI SME Finance Sub-group, August 2011. 

13 Source: “Policy Paper on Agricultural Finance for Small and Medium-Sized Enterprises: Executive Summary for GPFI Report” prepared 

by IFC for the GPFI SME Finance Sub-group (August 2011).


The following high-level aspirations are recommended 

as an overall guide when embarking upon the challenging 

task of developing country-level targets: 

• Country ownership and commitment. 

• Encompass the definition of full financial inclusion. 

• Take into account how countries’ differing starting 

points affect what is realistic and aspirational for 

target setting. 

• Targets should be determined through data-driven 

and evidence-based methodology. 

Building inclusive financial systems is a multi-stage 

journey, and different types of indicators are suitable 

for different stages of this journey. The stages of 

this journey may not necessarily be sequential, but 

some may overlap with one another; however 

within each stage, it is possible to consider indicators 

grouped into three as input, output and impact. 

Input indicators describe the key characteristics of 

the enabling environment such as public sector 

driven enablers, macroeconomic descriptors or private 

sector drive, output indicators capture consequences 

of input actions such as access, usage, and 

quality, and impact indicators measure improvements 

in well-being such as firm profitability due to 

financial inclusion policies. 

G-20 Principles for Innovative 


A starting point for triggering country-level development 

is to develop key principles that can guide 

actions at a high level. The national leaders at the 

G-20 Toronto Summit, in June 2010, adopted the nine 

“Principles for Innovative Financial Inclusion.” These 

principles for innovative financial inclusion outline 

some of the key steps necessary to create an enabling 

policy and regulatory environment for improved 

financial access. The principles derive from the experiences 

and lessons learned from policymakers 

throughout the world, especially leaders from developing 

countries. 14 

They are directly applicable to 

many aspects of SME finance, and cover leadership, 

diversity, innovation, protection, empowerment, 

cooperation, knowledge, proportionality, and regulatory 

framework. 

C.1. Regulatory and Supervisory 

Frameworks 

The legal and regulatory framework establishes the 

rules within which all the financial institutions, instruments, 

and markets operate in a given country. It 

includes banking, insurance, leasing, factoring, and 

security laws, as well the respective bodies of secondary 

regulations and guidelines. Sound legal and regulatory 

frameworks that are effectively enforced 

promote market development and competition, while 

subjecting financial institutions and agents to sound 

and appropriate prudential regulation and rules of 

conduct in order to protect consumers and depositors 

as well as to ensure market stability. Thus, several 

objectives need to be balanced, of which access to 

finance is one. 

C.1.1. ROLE OF REGULATORS 

The primary role of regulators is to ensure the efficient 

regulation and supervision that is essential to a wellfunctioning 

economy and that underpins economic, 

social, and environmental objectives. The financial 

system in particular cannot operate without a range of 

comprehensive regulatory frameworks, including 

those that establish accounting, auditing, legal, and 

judicial systems, as well as sector-specific requirements 

such as prudential regulation. Regulation that is 

properly designed and implemented helps the financial 

system to function as intended. In this context, highquality 

regulation may be defined as that which produces 

the desired results as cost efficiently as possible. 

The two main components of this definition are that 

regulation succeeds in achieving the intended objective 

(i.e., it is effective) and does so at reasonable cost 

(i.e., it is efficient). 

14 “Innovative Financial Inclusion: Principles and Report on Innovative Financial Inclusion from the Access through Innovation Sub-Group 

of the G20 Financial Inclusion Experts Group”, May 25, 2010.


15 

Regulators and supervisors play a key role in the 

design and implementation of an enabling environment 

for SME finance, which includes providing the 

legal and regulatory framework in support of SME 

access to finance, and can also include interventions 

promoting SME finance, and the collection and analysis 

of data on financial inclusion. While data collection 

can support the prudent development of SME 

finance through enabling effective supervision of 

expanding provision of financial services, and 

through providing much needed market data to 

financial institutions, other regulatory measures 

have risked distorting markets or have been 

counterproductive. 

For example, interest rate ceilings designed to make 

finance more affordable may actually depress SME 

lending volumes, while directed lending, for example 

through requirements for banks to set up branches in 

rural areas or to lend to certain SME sectors, can add 

costs and risks for SME lending. Exemptions on 

reserve requirements have been used to try and stimulate 

SME lending, and in some cases to lower the 

interest rates for SME borrowers. For example, the 

Egyptian central bank waived its 14 percent reserve 

requirement on loans to SMEs, for an amount equal 

to the SME lending of each bank. The Jordanian central 

bank also reduced reserve requirements for an 

amount equivalent to SME lending, on the condition 

that banks lent at a lower rate (relative to the prime 

rate) to SMEs. 

Standards, guidelines, good practice 

The policy and regulatory framework should be proportionate 

with the risks involved in such innovative 

products and services, and is based on an understanding 

of the gaps and barriers in existing regulation. 

Under a proportional regulatory framework, regulatory 

requirements vary with the benefits and risks 

associated with a financial service or the provider of 

the financial service. The aim should be for regulatory 

policies that enable, rather than inhibit, appropriate 

innovation in connection with regulated activities in a 

way that manages risk. The challenge lies in tailoring 

regulation to mitigate the risks of specific types of services 

and delivery approaches without imposing an 

undue regulatory burden that could stifle innovation. 

Proportionality in regulation can be accomplished, for 

example, by setting different requirements correlated 

with the differing levels and types of risk involved in 

different activities. Regular, thorough diagnostic exercises 

that identify the gaps and barriers in current 

policy and regulation should inform sound innovative 

financial inclusion policy formulation, as the experiences 

of Argentina, Russia, and Mexico demonstrate. 

Such reviews are important because the barriers and 

gaps in existing regulation that prevent innovative 

financial inclusion reaching scale rapidly, yet safely, 

are not necessarily obvious. 

While designing and enforcing an enabling environment 

and intervention mechanisms in support of SME 

access to finance, regulators need to keep overarching 

objectives in mind: ensuring the stability of the financial 

system, promoting financial literacy and consumer 

protection, and respecting Anti-Money Laundering 

(AML) and Combatting the Financing of Terrorism 

(CFT) regulations. The pursuit of these objectives can 

involve trade-offs with measures aimed at widening 

access to finance. The design of access to finance 

reforms needs to be balanced with these overarching 

objectives in mind, and the South Africa example on 

page 17 illustrates how this can be achieved in an 

emerging market. 

Regulators can also collect and evaluate data on SME 

access to finance, building on credit registry and 

other reporting data that they do or could collect. 

Financial inclusion data is critical in supporting evidence-based 

policymaking, helping inform the prioritization 

of efforts, and tracking progress of the 

proposed targets. Without standardized, comparable, 

and regularly updated data at the global and national 

level, progress tracking and target setting is suboptimal 

and lacks direction. Thus, data and measurement 

is a key and indispensable area of work that 

requires: i) defining measurable financial inclusion


General Good Practices for an Effective and Efficient Financial Regulatory Process 

Good practice regulation making process is comprised of four main steps. 

First, policymakers should make the case for regulatory intervention. This involves: 

• defining the regulatory philosophy and establishing proper policy objectives; 

• establishing an open and transparent regulatory decision-making process; and 

• comprehensively analyzing the market failure to identify and define the issue to be addressed and determine whether 

there is evidence that government action is justified. 

Second, policymakers should design and implement appropriate policy measures by: 

• identifying measures that address the problem as identified, including non-regulatory measures and the status quo; 

• assessing the benefits and costs of each alternative policy proposal, preferably through a formal and structured 

regulatory impact assessment; and 

• designing and implementing the chosen regulatory solution while taking account of issues including clarity, 

consistency, proportionality and accountability. 

Third, to guarantee the success of policies, authorities should design effective enforcement strategies, preferably by 

leveraging off existing incentive structures. Enforcement measures should be fair and transparent and well-integrated 

in the overall regulatory decision-making process. 

Finally, policymakers should conduct ex-post evaluation, to determine whether the regulation remains relevant in its 

current form or if its goals could be better achieved in another way. Less frequently, the entire regulatory framework, 

including the underlying regulatory philosophy, should also be reviewed. 

G-20 Financial Inclusion Experts Group—ATISG Report p.20 

dimensions; and ii) improving current and developing 

existing data collection efforts and indicators 

towards the goal of establishing an international 

financial inclusion data platform. 

An example of directed lending requirements is outlined 

on page 17, for insights into the use of directed 

lending for SME finance and its potential harmful 

impacts on lending costs and risks. 

Challenges and Priorities for Least Developed Countries 

One of the largest challenges faced by LDCs is the 

weak capacity of the regulatory and supervisory 

bodies. Central banks and financial market authorities 

often struggle to perform their main regulatory and 

supervisory tasks due to the lack of adequate financial 

and human resources. Adding additional responsibilities 

(e.g., monitoring SME finance) or expanding their 

coverage (e.g., covering microfinance institutions, 

non-bank financial institutions, etc.) may represent a 

capacity challenge that limits the effectiveness of 

those reforms. 

The lower levels of regulatory and supervisory 

capacity particularly common in low-income jurisdictions 

suggest the need for careful prioritization 

of the most important challenges to be addressed 

and the most promising opportunities to be seized. 

Regulators of LDCs may also face challenges to adopt 

a “proportionate” regulatory or supervisory 

approach (or a “risk-based approach”). LDCs may 

not currently have the capacity to implement a proportionate, 

or risk-based, approach, which requires 

more human resources, information, and financial 

resources. Instead, they may prefer to start with a 

basic institutional framework that is more compliance 

or rules-based, while gradually shifting to a 

more sophisticated regulatory framework over time 

as their markets and regulatory and supervisory 

capacity develops.


17 

Finding the right balance between financial access and AML/CFT regulation: The 

case of the South Africa 

South Africa: In South Africa the Financial Intelligence Centre Act (FICA) and its regulations determine the AML/CFT 

obligations of financial institutions. The Act provides that an accountable institution must keep a record of the identity 

of the client and any documents obtained in verifying that identity. Two requirements of the FICA regulations 

were subsequently identified as potential obstacles for customers in the low-income market: (i) a national identity 

document to verify personal details, and (ii) documentary proof of residential address when opening a bank account. 

Approximately one-third of adult South Africans, many of whom live in informal housing, could not provide such 

documentary proof of residential address. 

• In 2002 an exemption was issued eliminating the need to obtain and verify address details, and relaxing recordkeeping 

requirements for accounts and services subject to balance and transaction limits. 15 

Further refinements in 

2004 supported a basic bank account (“Mzansi”) and related payment services. To date, more than six million such 

accounts have been opened. 

• In 2006, the South African Reserve Bank allowed banks to open mobile phone-operated bank accounts (within 

certain transaction and balance limits) without having to undertake face-to-face customer due diligence and with 

even lower transaction limits. 16 

Lessons for SME Banking in India: Promoting Branch Expansion to Underserved Areas 

Between 1977 and 1990, the Reserve Bank of India mandated that a commercial bank could open a new branch in a 

location that already had bank branches only if it opened four in locations with no branches. This regulation was part 

of a social banking program that tried to expand access to financial services in rural areas. An ex post evaluation of 

this policy 17 shows that it had sizable effects. The 1:4 rule was a binding constraint on banks and, together with a regulated 

branch-level loan-deposit ratio of 60 percent, led to an increase in bank branches and in rural credit in less 

densely banked states, even after controlling for other state characteristics that might have driven branch and credit 

expansion. 

But there was a significant downside: commercial banks incurred large losses attributable to subsidized interest rates 

and high loan losses—suggesting potential longer-term damage to the credit culture. Furthermore, many governments 

do not have the carrot of licensing branches in markets as dynamic as those of some of the largest Indian cities 

to compensate for the stick of compulsory rural branches. 

Finance for All, World Bank, 2008 

15 The balance may not exceed ZAR 25,000 (approximately US$3,400); the daily transaction limit is ZAR 5,000 (approximately US$680), 

and the monthly limit is ZAR 25,000 (approximately US$3,400). 

16 The transactions on such an account are limited to ZAR 1,000 (approximately US$135) per day. If clients wish to exceed this limit, a 

face-to-face confirmation of the client’s identity must be carried out in accordance with the provisions of Exemption 17. Some industry 

participants argue that the caps in Guidance Note 6 are too low and should be adjusted upward to facilitate market development. 

17 Burgess and Pande (2005)


C.1.2: BASEL II/III AND SME FINANCE 

Basel II is a framework providing harmonized rules for 

the calculation of regulatory capital measures. The 

purpose of Basel II, which was initially published in 

June 2004, was to create an international standard 

determining the amount of capital banks should put 

aside to guard against the types of financial and operational 

risks they face. Capital requirements ensure that 

financial institutions have sufficient capital to sustain 

operating losses while still honoring withdrawals, and 

thus help protect the international financial system 

from the types of problems that might arise should a 

major bank or a series of banks collapse. 

During the consultation period on Basel II, some 

empirical studies supported claims that the more risksensitive 

nature of Basel II would reduce the availability 

and increase the cost of finance for SMEs, in 

particular unrated SMEs, as banks would be required 

to hold relatively more capital for SME exposures. In 

response, the Basel Committee made some specific 

changes to the final version in order to accommodate 

SME Finance. These changes include: (i) at a given 

probability of default, exposures to SMEs were to 

require relatively less capital than larger firms in riskweighting 

calculations; (ii) SME exposures classified as 

retail were to have a specific risk weight curve; (iii) the 

risk weight for non-mortgage retail exposures was 

reduced under the standardized approach; and (iv) 

credit risk mitigants such as collateral and guarantees 

were better recognized. The debate on the impact of 

Basel II on SME Finance has abated since the release of 

the final version of the Basel II Framework. The changes 

largely succeeded in addressing the main concerns 

about the potential impact of Basel II on SME Finance, 

and the impact studies of the Basel Committee have 

suggested that, broadly speaking, capital requirements 

for SMEs would not be significantly higher than those 

under Basel I. 

Basel III is a new global regulatory standard on bank 

capital adequacy and liquidity agreed by the Basel 

Committee on Banking Supervision (BCBS) in response 

to the deficiencies in financial regulation revealed by 

the global financial crisis. Basel III strengthens further 

the bank capital requirements that were introduced 

under Basel II and introduces new regulatory requirements 

on bank capital, liquidity, and bank leverage. It 

will be phased in over the period 2011-2019. 18 

During the consultations on the preparation of this 

Policy Guide, some concerns were raised about the 

impact of Basel III on banks’ ability to lend to SMEs, 

although the gradual implementation of the new rules 

through 2019 give banks time to adjust to the new capital 

requirements. The argument was made that the 

new capital requirements, liquidity requirements, and 

leverage ratio all could potentially reduce banks’ ability 

to lend to SMEs, and that an objective assessment on 

the Basel III impact on SME lending is necessary. It was 

noted that there was no clear indication that the leverage 

ratio, liquidity requirements, or increase in capital 

levels will have a particular effect on SME lending, and 

that the credit risk framework regarding SME portfolios 

has remained unchanged. The increased capital 

requirements will raise the average costs of banks’ liabilities, 

which could raise the interest rates charged to 

bank clients, including SMEs. 

Standards, guidelines, good practice 

Regulators from 25 African central banks noted the 

following at a workshop on the Implementation of 

International Standards for Banking Supervision and 

the Basel Capital Framework, in Uganda, April 2011: 

• International standards provide an important orientation 

and point of reference for the long-term reform 

agenda, but should not be seen as blueprints for the 

reform process in African countries. Maximizing regulatory 

effectiveness and financial stability under 

resource constraints requires appropriate sequencing 

and prioritization of building blocks of financial regulation 

and supervision. Rather than adopting international 

standards wholesale, African regulators need 

to judge which elements of the standards could 

18 For further information see: http://www.bis.org/bcbs/basel3.htm


19 

provide useful and effective building blocks within 

the current country and regional context. 

• While many African countries intend to move to 

adopt the Basel II capital framework the focus should 

be on implementing the supervisory processes outlined 

under Pillar 2 and Pillar 3. The importance of 

enhancing supervisory capacity as a precondition for 

adopting the more complex rules under the Basel 

capital framework was emphasized. Further, it was 

recognized that the adoption of Basel II does not 

constitute a necessary precondition for the implementation 

of important elements of Basel III. 

Financial stability might better be achieved by focusing 

on increasing supervisory capacity and adding 

those provisions from the new Basel III framework 

that are of higher immediate importance for African 

financial systems. 

Challenges and priorities for LDCs 

Basel II was primarily aimed at “internationally active 

banks.” Many developing country supervisors are still 

struggling with the core principles, as well as with 

problems relating to capacity, independence, legal protection, 

and more. To accommodate smaller banks 

with less sophisticated risk management systems, 

approaches for a simpler and more prescriptive risk 

management system similar to Basel II were developed. 

However, banks in developing countries will 

also be subject to more stringent capital requirements 

(with greater reliance on core tier capital), leverage 

ratios, and other rules being proposed at the international 

level by the BCBS if they choose to implement 

Basel III. This should not pose an immediate problem, 

as emerging country banks are generally better capitalized 

and less leveraged than banks in developed countries, 

but these banks will need to build up more 

capital in order to meet the growing needs of their 

economies, including the demand for credit by SMEs. 

Emerging country banks will also need to strengthen 

their risk governance in line with the more stringent 

standards being currently proposed by the BCBS. 

Recommendations regarding the implementation of 

Basel II in developing countries, with particular reference 

to the effects on SME development, include: 19 

• It is advisable that LDC regulators proceed cautiously 

in implementing Basel II. 

• Political support may be needed for implementation, 

so that LICs do not rush to implement the more 

complex approaches, which are favored by the international 

banks. 

• LIC regulators need to carefully assess the broader 

implications of Basel II, for banking stability, for 

credit policy, for access to credit for SMEs, and 

on competitiveness of national versus international 

banks. 

• Higher levels of technical assistance to LICs are 

necessary. 

• Regional collaboration is desirable, in the mode of 

the Caribbean Group of Securities Regulators, allowing 

for the possible development of a uniform 

approach, and forging a common position on specific 

issues. 

• Other more detailed recommendations on prudential 

regulation and supervision are set out in the 25 

Basel Core Principles for Effective Banking 

Supervision. 

• Capacity problems, issues related to consolidated 

supervision, independence of the supervisor, legal 

protection for supervisors, and other issues need to 

be addressed. 

Most of the Basel III measures proposed are of limited 

immediate relevance to African banking sectors, 

since the weaknesses they address are largely a result 

of regulatory philosophies and market practice in 

developed markets. Basel III outlines various measures 

to raise the quality, consistency, and transparency 

of the regulatory capital base, focusing largely 

on the definition of Tier 1 capital. In most African 

states, bank capital structures are a relatively straightforward 

composition of common shares and retained 

earnings and thus already fulfill Basel III quality 

requirements. 

19 Gottschalk, 2007


C.1.3: ENABLING REGULATORY 

FRAMEWORKS FOR ALTERNATIVE SME 

FINANCE PRODUCTS: LEASING, FACTORING 

Improvements in access to finance for SMEs do not 

depend on banks alone, as they can be achieved 

through a range of non-bank financial institutions 

(NBFIs) as well. NBFIs of different types provide a 

wide range of services, including: hire purchase 

transactions such as leasing of machinery or equipment; 

the factoring or discount purchasing of 

accounts receivable and other forms of supply chain 

finance; and new equity to invest in companies. 

Provision through NBFIs can be enhanced by reforming 

tax, legal, and regulatory environments, and by 

supporting the introduction of technological platforms 

that support a wider variety of financial products 

and services to be developed, drive down the 

costs of financial access, and reach previously 

untapped markets. 

Factoring is an important source of working capital 

finance for SMEs, especially in jurisdictions where the 

financial infrastructure is deficient. Factoring entails 

the purchase by the lender of a firm’s accounts receivables 

at a discount and, in the case of non-recourse 

provisions, the collection of invoices directly from the 

parties that owe money. Factoring addresses the problem 

of SME opacity by focusing on the quality of the 

obligor; in effect, a risky supplier can transfer its credit 

risk to that of a higher quality buyer. In recent years, a 

variation referred to as reverse factoring, or “supplychain 

financing,” has become a popular financial 

instrument. With reverse factoring, the financial institution 

purchases receivables only from high credit 

quality buyers rather than a portfolio of all buyers of 

specific sellers, resulting in the provision of low-risk 

loans to high-risk suppliers (SMEs). Reverse factoring 

is particularly useful for SMEs in countries with underdeveloped 

contract enforcement regimes and weak 

credit information systems. 20 

Likewise, leasing appears as an important complementary 

source of investment finance, particularly in 

countries where the information infrastructure is 

weak. A potential advantage of leasing lies in the fact 

that it focuses on the firm’s ability to generate cash 

flows from business operations to service the leasing 

payment, rather than on its credit history or ability to 

pledge collateral. 

Standards, Guideline, Good Practices 

Leasing: 

The IFC provides detailed guidelines for emerging 

economies on developing the leasing sector. 21 A legislative 

framework for leasing should: 

• Clarify rights and responsibilities of the parties to 

a lease; 

• Remove contradictions within the existing legislation; 

• Create non-judicial repossession mechanisms; and 

• Ensure only the necessary level of leasing industry 

supervision and licensing. 

Strengthening the legal framework for leasing can be 

achieved through a specialized leasing law combined 

with appropriate changes in related pieces of legislation. 

Among others, the definition of leasing needs to be clear 

and a fair balance established between the rights and 

responsibilities of the parties to a lease. It is important to 

establish regulations for other forms and types of leasing, 

such as sale and lease-back and sub-leasing. In addition, a 

leasing law should address the following elements: 

• First, the process for registering leased assets should 

be strengthened. One of the first priorities entails 

the development of registries in which lessors may 

publicize their interest in the leased asset and protect 

its ownership rights. Ideally, there should be a unified 

registry for movable collateral where all security 

interests are recorded, with the lessor’s interests in 

leased assets recorded. 

• Second, repossession procedures may need to be 

defined and enforced. The right of the lessor (as owner) 

20 Klapper (2005); IFC Board paper on Warehouse Receipt Financing and Supply Chain Financing, 09.09.2010. 

21 Fletcher et al., (2005) “Leasing in Development: Guidelines for Emerging Economies”, IFC, available at: http://www.ifc.org/ifcext/sme. 

nsf/AttachmentsByTitle/Leasing_in_Dev_Nov05.pdf/$FILE/Leasing_in_Dev_Nov05.pdf


21 

to repossess a leased asset expediently should not 

depend on the type of breach committed by the lessee. 

• Third, tax rules should be clear and neutral, removing 

any bias against leasing. The income tax treatment 

of leasing and loans should be similar, as there 

is little difference between leasing and loan finance, 

and valued added tax rules should clarify that a leasing 

operation is a financial service, not the sale of a 

good or a rental. 

• Fourth, insolvency regimes must clarify the rights 

of lessors and lessees under bankruptcy. The consequences 

of default should be clearer. In particular, 

lessors’ rights under bankruptcy should be preserved, 

as lessors are a particular class of secured 

lender – leased assets do not belong to the insolvent 

company and should be returned to the owner 

(the lessor). 

The IFC recommends that International Accounting 

Standard (IAS) 17, on Leases, is used as a basis for the 

definition of local leasing legislation, including 

accounting for leases. IAS-17 provides a useful framework 

and guidelines for the development of domestic 

leasing legislation. While the application of IAS may 

not be common to all countries, the adoption of IAS is 

a target for most countries. With this in mind, using 

IAS-17 as the basis for local leasing legislation, it is possible 

to build in a quality standard for that legislation. 

IFC also recommends that leasing be classified as an 

investment activity and a financial service, because it is 

important for leasing to operate on the same level playing 

field as other forms of credit. 

Supervision of leasing by central bank structures 

should be determined based on country-specific factors. 

If the lease is financed by an institution that is 

already under central bank supervision, supervision by 

central bank structures would be prudent. While 

establishing minimum capital requirements for leasing 

institutions might help weed out inadequately capitalized 

leasing companies, this restriction may also 

inhibit the development of the leasing industry, particularly 

in nascent markets where it may be slow to 

develop. Hence, the establishment of obligatory capital 

requirements for leasing calls for careful evaluation in 

the context of the existing legal and regulatory framework, 

as well as other factors. 

To increase the volume of lease transactions in LDCs, 

IFC Advisory Services has created a leasing program in 

Africa designed around three core products that are 

provided individually or as part of a package depending 

on country needs: i) entry-level advisory services 

addressing legislative and regulatory constraints for 

leasing, including tax issues at regional and country 

level; ii) value added advisory services by partnering 

with international experienced leasing technical partners 

to provide know how transfer, capacity building, 

and financing; and iii) mobilization of investment capital 

by addressing the availability of medium- to 

Fostering SME Lending Through Leasing 

Jordan’s Ministry of Industry and Trade, in coordination with IFC, introduced an initiative in 2006 with the objective 

to improve the leasing environment in Jordan, and to promote and increase the volume of leasing activities. The 

project’s main activities include: (i) provide support to policymakers to draft, lobby, and promote leasing legislation 

based on best practices; (ii) build capacity of leasing stakeholders (e.g., FIs, equipment suppliers, investors) through 

consultations and training; (iii) increase awareness of benefits of leasing to SMEs to finance business assets; and, (iv) 

promote and facilitate leasing investments. 

As a result of the initiative, four laws were introduced: Law on Leasing, Movable Leased Assets Registration 

Instructions, and Registration Instructions for Leased Vehicles and Internal Procedures for Land Registration. 

Financial leasing has become more favorable and the leasing market has grown substantially. 

Source: G20 Stocktaking Report, 2010


long-term capital to fund leasing operations in the 

region by facilitating partnerships between technical 

partners and prospective local and international investors 

interested in the leasing market. 

Factoring: 

Can be a powerful tool in providing financing to highrisk, 

informationally opaque sellers, which are often 

SMEs. Factoring’s key virtue is that underwriting is 

based on the risk of the receivables (i.e., the buyer) 

rather than the risk of the seller. Therefore, factoring 

may be particularly well suited for financing receivables 

from large or foreign firms when those receivables 

are obligations of buyers who are more 

creditworthy than the sellers themselves. Factoring 

can provide important export services to SMEs in both 

developed and developing countries. Like traditional 

forms of commercial lending, factoring provides SMEs 

with working capital financing. 

Factoring only requires the legal environment to 

sell, or assign, receivables and depends relatively 

less on the business environment than traditional 

lending products. Another merit of factoring in a 

weak business environment is that the factored 

receivables are removed from the bankruptcy estate 

of the seller and become the property of the factor. 

In this case, the quality and efficacy of bankruptcy 

laws are less important. 

However, factoring may still be hampered by weak 

contract enforcement institutions and other tax, legal, 

and regulatory impediments. For example, factoring 

generally requires good historical credit information 

on all buyers; if unavailable, the factor takes on a larger 

credit risk. In general, a small firm sells its complete 

portfolios of receivables in order to diversify its risk to 

any one seller. In fact, many factors require sellers to 

have a minimum number of customers in order to 

reduce the exposure of the factor to any one buyer and 

to the seller’s ability to repay from receipts from other 

buyers, in the case that a buyer defaults. However, this 

diversified portfolio approach requires factors to collect 

credit information and calculate the credit risk for 

many buyers. In many emerging markets the credit 

information bureau is incomplete (i.e., may not include 

small firms), or non-bank lenders, such as factors, are 

prohibited from joining. In the case of exporters, it 

might be prohibitively expensive for the factor to collect 

credit information on firms around the world. 

Factoring has developed in a variety of legal and regulatory 

settings, specific to the individual country in 

which the factoring is provided. Points of reference 

and guidance for legal reforms to encourage factoring 

include the United Nations Commission on 

International Trade Law (UNICTRAL), and also the 

International Institute for the Unification of Private 

Law (UNIDROIT) convention of 1988. 


Many LDCs face structural obstacles in developing a 

leasing industry, including the absence of clearly 

defined and predictable laws and regulations governing 

leasing transactions, unclear accounting standards, 

the lack of an appropriate tax regime, or constrained 

funding. Introducing leasing as an alternative source of 

equipment finance for enterprises promotes the development 

of domestic financial markets and encourages 

competition and efficiency for sustainable financial 

market growth. It is a relevant product to support 

investments in the real and service sectors, and to spur 

productivity, profits, jobs, and income. 

C.1.4. COMPETITION 

Theoretical models of lending and industrial organization 

predict that firms’ access to credit depends critically 

on bank market structure. The market power view 

argues that concentrated and uncompetitive banking 

markets are associated with less credit availability and 

higher price of credit, while the information view argues 

that competitive banking markets can lower credit by 

reducing banks’ incentive to invest in acquiring soft 

information, a key ingredient in relationship lending. 

Recently, a number of papers have questioned this 

second view, highlighting that relationship lending is


23 

Fostering SME Lending Through Supply Chain Finance: 

Nacional Financiera (NAFIN), Mexico 

NAFIN is a development bank in Mexico that offers on-line factoring services to SME suppliers. In 2001 Nafin developed 

a “Productive Chains” program that works by leveraging the links between large corporate buyers and small 

suppliers. The program allows small suppliers to use their receivables from big buyers to receive working capital 

financing, effectively transferring suppliers’ credit risk to their high-quality customers to access more and cheaper 

financing. 

Two types of supply chain finance are offered: (i) Factoring offered to SMEs without any recourse, collateral, or service 

fees, at variable risk-adjusted rates; and (ii) Contract Financing, which provides financing up to 50 percent of 

confirmed contract orders from big buyers with NAFIN supply chains, with no fees or collateral, and a fixed rate. 

Financial training and technical assistance are also offered under the program. 

As of mid-2009, the program comprised 455 big buyers (about 51 percent in the private sector) and more than 

80,000 SMEs, and had extended over USD 60 billion in financing. About 20 domestic lenders participate in the program, 

including banks and independent finance companies. 

Source: G-20 Stocktaking Report, 2010 

only one type of technology that banks can use in 

lending to SMEs. 22 

Furthermore, a number of recent 

empirical papers have found evidence consistent with 

the market power view when it comes to the impact of 

competition on bank lending to SMEs. 23 

The issue of competition and credit availability matters 

to SMEs in particular, because they are more limited in 

terms of the sources of finance available to them. Unlike 

large corporations, SMEs typically do not have access to 

the capital markets or to foreign sources of finance. 

While in the case of other product and services, competition 

is seen as unquestionably beneficial, when it 

comes to the financial sector, there can be a trade-off 

between competition and stability, and an appropriate 

balance must be struck. 24 A sound regulatory framework 

is important to minimize these risks. 25 

For 

example, capital requirements and provision 

requirements can slow the growth of lending that 

might be motivated by competition, while competition 

may generate incentives for excessive lending. A 

positive balance can be promoted by imposing disclosure 

and information requirements, along with predatory 

lending regulation that places the burden of 

avoiding bad loans on the lender. 

To increase financial access, leaders in this field have 

recognized that “policy should encourage competitive 

provision of financial services to customers such as 

low- and middle-income households and small firms. 

Policy should favour entry of qualified suppliers that 

are likely to improve the quality and price of services 

to such customers (in a manner consistent with financial 

stability and consumer protection). Competition 

policy should empower the active investigation of 

anticompetitive behavior.” 26 

Effective competition 

requires clients to have both the information and the 

22 See Berger and Udell (2006), Beck, Demirguc-Kunt, and Martinez Peria (2010), De la Torre, Martinez Peria and Schmukler (2009). 

23 Carbo-Valverde, Rodriguez-Fernandez, and Udell (2009), Mercieca, Schaeck, Wolfe (2009). 

24 Vives (2010) available at: http://www.voxeu.org/index.php?q=node/5534 

25 Beck et al, 2011. A number of recent papers have questioned the negative implications of competition for stability. See Koskela and 

Stenbacka (2000), Beck, Demirguc-Kunt and Maksimovic (2004), Beck, Demirguc-Kunt, and Levine (2006), Cetorelli and Strahan 

(2006), Carletti, Hartmann, and Spagnolo (2007), Schaeck and Cihak (2008). 

26 Claessens, Honohan and Rojas-Suarez (2009).


skills to compare rates and product attributes, one of 

the many reasons that developing financial capability 

is so critical. Examples of the positive effects of competition 

include better terms for borrowers, e.g., reduced 

interest rates and expanded services. Examples of the 

negative effects of competition in poorly regulated and 

supervised financial markets abound. 27 

Standards, Best Practices, and Examples 

An effective legal and regulatory framework will support 

a competitive environment by avoiding overly 

restrictive licensing requirements and allowing international 

and regional banks with better SME lending 

technologies and downscaling capacity to enter the 

market. It will also enable the growth of institutions 

that have proved profitable, such as mutual banks, and 

promote the development of alternative lending technologies 

such as leasing and factoring. Finally, an 

effective legal framework promotes the development 

of securities markets and institutional investors as an 

alternative to bank lending for the largest firms, thus 

producing positive spill-over effects to SME lending. 

Competition among financial sector players can be 

promoted further by introducing technological platforms 

in key areas, facilitating a variety of financial 

products and services, driving down the costs of financial 

access, and reaching previously untapped markets. 

A competitive marketplace for SME finance should 

include financial institutions as well as non-financial 

institutional providers with extensive business networks 

meeting appropriate criteria. 

Of course, competition should not be introduced at the 

expense of prudential safeguards. Minimum capital 

requirements, adequate fit and proper tests, and other 

regulations would still apply. Moreover, banks in 

Example: Banking Sector Competition and Access to Finance in the Middle East and 

North Africa (MENA) 

World Bank research suggests that the banking sector in the MENA region has a relatively low level of competition, 

due to a poor credit information environment combined with strict regulations and practices governing bank entry. 

Thus, measures to promote competition in MENA should focus on creating a more contestable market for banking 

and on improving the scope, access, and quality of credit information among banks. In addition, the promotion of 

stock markets and other non-bank financial intermediaries could help to promote a more competitive banking sector. 

Improving competition in the MENA region may require a package of reforms, including relaxing licensing requirements 

and procedures without sacrificing the quality of entrants, improving financial infrastructure, and developing 

alternatives to bank lending. For example, more effective credit information systems would level the playing field 

between large and small banks (including new foreign banks) and allow these banks to expand more rapidly. Likewise, 

the existence of leasing and factoring providing alternative finance to SMEs, and institutional investors (mutual funds, 

insurance companies) providing the investor base for corporate issues, would increase competitive pressures on all 

segments of credit markets. 28 

The high loan concentration in MENA also reflects many cases of long-established connections between large banks 

(including state banks and family-controlled private banks) and industrial groups. Such lending frequently entails 

large exposures and connected lending that may not have been well-regulated and supervised. Therefore, a stricter 

approach to regulation and supervision of large exposures and connected lending would need to be included in a 

package designed to reduce loan concentration and improve competition. 

27 G20 Financial Inclusion Experts Group—ATISG Report. 

28 Rocha et al, “Financial Access and Stability: A Roadmap for the Middle East and North Africa”, 2011, World Bank


25 

Best Practice: Coherence between competition policy and regulatory policy 

Close collaboration is recommended between the regulator (in charge of financial stability and prudential regulation 

and supervision) and the competition authority (in charge of keeping the market competitive). 

• •First, regulatory requirements and competition policy need to be coordinated. 

• •Second, a protocol for cooperation between the regulator and the competition authority should be developed. 

This is particularly important in crises. The competition authority can commit to addressing too-big-to-fail problems 

that lead to competition distortions; the regulator can address the too-big-to-fail issue and moral hazard through 

systemic capital charges, effective resolution procedures, and restrictions on the scope of banking activities that 

target conflicts of interest. 

• •Finally, crisis procedures should be established that define liquidity help from recapitalization and conditions for 

restructuring to avoid competitive distortions. Entities close to insolvency should be tightly regulated (and activities 

restricted) in a framework permitting prompt corrective action.” 

Source: Vives (2010) 

developing countries will also be subject to more stringent 

capital requirements (with greater reliance on 

core tier capital), leverage ratios, and other rules being 

proposed at the international level by the BCBS. This 

should not pose an immediate problem, as emerging 

country banks are generally better capitalized and less 

leveraged than banks in developed countries, but these 

banks will need to build up more capital in order to 

meet the growing needs of their economies, including 

the demand for credit by SMEs. Emerging country 

banks will also need to strengthen their risk governance 

in line with the more stringent standards being 

currently proposed by the BCBS. 

Financial sector liberalization and banking regulations 

that allow the entry of sound and efficient banks 

(both foreign and domestic) and promote market 

competition may reduce margins and interest rate 

spreads. Such changes may also promote dynamism 

within the banking sector, as providers facing tough 

competition from new entrants seek new markets, 

and can further encourage local banks to look beyond 

traditional business lines, incentivizing them to 

develop SME banking. At a national level, openness to 

foreign banks may serve to increase access to capital, 

although it may also increase the risk of contagion 

from financial crises originating elsewhere, thus 

reinforcing the need for a sound regulatory 

framework. The 1989 World Development Report 

provides a summary of sequencing strategies that 

should be followed in liberalizing financial sectors, 

in order to minimize the risk of instability. 


In smaller and/or lower income countries, policymakers 

seeking to stimulate greater competition may only 

have access to a limited range of effective tools. 

Research on competition that targets developed countries 

suggests that a liberal entry policy vis-à-vis reputable 

financial service providers can help. Also of use 

are transparency of product pricing and the compulsory 

sharing of credit information, and rules about 

network access and interoperability of networks in the 

retail payments system. However, the latter may not be 

fully effective, since the applicability to developing 

countries of lessons learned in advanced economies is 

not straightforward. 

C.2. Financial Infrastructure 

Financial infrastructure as defined here includes 

accounting and auditing standards, credit reporting 

systems (credit registries and bureaus), collateral and 

insolvency regimes, and payments and settlement 

system. Financial infrastructure reduces the


information asymmetries and legal uncertainties that 

increase risk to lenders and constrain the supply of 

finance. Financial infrastructure development improves 

financial access for all firms, but SMEs benefit proportionately 

more, as the problems of opacity and information 

asymmetry are more severe in the case of 

smaller firms. 

Establishing a solid financial infrastructure (auditing 

and accounting standards, credit registries/ bureaus, 

collateral, and insolvency regimes) should be a priority 

in the financial development agenda of most developing 

countries, as it can lower the costs and risks to 

financial institutions of serving SMEs, open the way for 

more modern and efficient lending techniques, and 

expand the proportion of SMEs that can viably be 

served. A sound financial information infrastructure 

should improve transparency and disclosure for SMEs 

in a cost-effective way, and help SMEs build a credit 

history, which is critical in helping to address both 

challenges of information asymmetry and cost to serve. 

C.2.1. SECURED TRANSACTIONS 

Creditor protection through modern secured lending 

legal regimes is associated with higher ratios of private 

sector credit to GDP. 29 

Collateral and credit information 

are critical elements of a functioning credit 

system. The lack of these elements creates information 

asymmetry and a risk premium for borrowers who 

want to access credit. Moral hazard and adverse selection 

will be reduced if collateral frameworks are 

improved. Increasing the protection of creditors and 

debtor’s rights and enforcement mechanisms can lead 

to a considerable increase in private sector credit to 

GDP and lowers NPLs. 30 

Effective collateral regimes 

contribute to SME finance by reducing the risks and 

losses of lenders. As in the case of credit bureaus, 

effective collateral regimes improve access to finance 

for all firms, but can prove particularly effective in 

improving access to SMEs. In countries with strong 

secured transactions regimes, asset-based lending 

technologies are facilitated. 31 

Typically, SMEs have limited immovable assets but possess 

a wider range of movable assets. An effective secured 

transactions regime facilitates lending by using the available 

movable assets as collateral in loan contracts. Firmlevel 

data from around the world highlights the mismatch 

between the assets that firms hold and the assets that most 

banks accept as collateral. 32 The value of movable property 

generally makes up three-quarters of firms’ total asset portfolios 

and yet, on average, banks predominantly accept only 

land and buildings as their main form of collateral (Figure 

2). Secured transactions laws and regulations, if formulated 

and implemented correctly, increase use of credit (via 

increased demand) by broadening the range of assets 

acceptable as collateral to banks to include both present 

and future assets (future crops or future receivables), tangible 

(equipment, vehicles, inventory, commodities, livestock, 

etc.) and intangible (accounts receivable, negotiable 

instruments, shares, intellectual property rights, etc.). 

Standards, Guidelines, Good Practice 

Modern principles of secured transactions systems 

have been established by the international community 

in the UNCITRAL Legislative Guide for Secured 

Transactions. 33 The recommendations of the Legislative 

Guide, as of this writing, constitute the most widely 

accepted international standards in this area. 

To create a modern secured transactions system, in 

line with internationally accepted standards, the following 

elements and principles of secured transactions 

reform should be emphasized: 34 

29 2005, Djankov et al 

30 See “Private Credit in 129 Countries”, Simeon Djankov, Caralee McLiesh and Andrei Schleifer, 2006. 

31 Berger, Allen N., Gregory F. Udell. 2006. “A more complete conceptual framework for SME finance”. World Bank. Available at http:// 

siteresources.worldbank.org/INTFR/Resources/475459-1107891190953/661910-1108584820141/Financing_Framework_berger_udell.pdf 

32 de la Campa, 2010 

33 The World Bank Group has also endorsed the UNCITRAL international standards on secured transactions as reflected in both the 

“World Bank Principles and Guidelines for Insolvency and Creditor Rights Systems (revised 2005)” and the IFC Guide on “Secured 

Transactions and Collateral Registries” (2010) 

34 Alvarez de la Campa, 2010


27 

Figure 2 Mismatch Between Firm Assets and Collateral Requirements: 

By composition of assets held 

by firm 

By composition of assets banks accept 

as collateral 

Machinery 

Land and 

Buildings 

Machinery 

Accounts 

Receivable 

Accounts 

Receivable 

Land and 

Buildings 

Source: World Bank Group Enterprise Surveys, average from 60 countries. 

• Creating unitary legal systems vs. fragmented laws. Creating or 

drafting a stand-alone law to regulate all aspects of 

security interests in movable property (secured transactions 

or personal property law) is considerably more 

efficient and creates less conflicts and uncertainty than 

revising existing provisions in multiple laws (commercial 

code, civil code, chattel mortgage law, etc.). 

• Establishing a broad scope of secured transactions law. This can 

be accomplished by: 

• Allowing all types of assets (both tangible and 

intangible, present and future) to be used as collateral 

for loans; 

• Allowing broad pools of assets (revolving assets) 

with a generic description of the assets to be 

accepted as collateral to facilitate the use of credit 

revolving facilities; 

• Adopting the “functional approach” to secured 

transactions, which should allow equal treatment 

to all transactions secured by movable property no 

matter what their contractual nature (financial 

leases, consignments, assignment of receivables, 

secured sales contracts, loans secured with movable 

property, retention of title, etc.) with regard to 

publicity and priority vis a vis third parties; and 

• Allowing the automatic extension of the security 

interests to products and proceeds of the collateral 

to protect the value of the security interest. 

• Simplifying the creation of security interests in movable property. 

This involves eliminating cumbersome and 

unnecessary formalities for the creation and enforceability 

of security interests in movable property. 

• Modernizing movable collateral registries. The collateral registry 

is the cornerstone of a functioning and efficient 

secured transactions system. The registry fulfills an 

essential function of the system, which is to notify 

parties about the existence of a security interest in 

movable property (existing liens) and to establish the 

priority of creditors vis a vis third parties. Best practice 

elements of a modern collateral registry include: 

• Single data source (centralized) registry for all 

security interests, including non-consensual liens; 

• Web-based electronic system accessible 24/7; 

• Notice-based system, meaning that only information 

about the creditor, the debtor (who can be 

both a legal or natural person), the collateral, and 

the amount of the obligation/loan needs to be 

entered, without the need of any documentation 

sustaining that information; 

• Registrations to be done by creditors or their legal 

representatives directly into the system; 

• Information available to the general public for 

searches; 

• Search criteria that includes, at least, debtor identifier 

and serial numbered collateral;


• Flat and reasonable fees for registrations and 

searches; 

• Registrar role limited to management, not to 

verify and modify information in the registry 

• Non-cash payments (debit/credit cards, electronic 

transfers, or pre-paid accounts); 

• Clearly defined liability of the registry for errors; 

and 

• Secured and protected registry data, with established 

disaster recovery sites. 

• Establishing clear priority schemes for creditors. A clear priority 

scheme is key to determine the sequence in 

which competing claims to the collateral will be satisfied 

when the debtor defaults on one or more of 

the claims. 

• Improving enforcement mechanisms. Enforcement and collection 

of debts upon defaulted loans is a major 

impediment for increasing access to credit. Speedy, 

effective, and inexpensive enforcement mechanisms 

are essential to realizing security interests. Enforcement 

is most effective when parties can agree on rights and 

remedies upon default, including seizure and sale of 

the collateral outside the judicial process. 

A collateral regime designed to facilitate increased 

access to finance for SMEs is likely to include: 

• A wide range of allowable collaterals (especially 

movable collateral); 

• The establishment of clear priority schemes for creditors, 

clarifying the rights of secured creditors; 

• Efficient collateral registries, making priority interests 

publicly known; and 

• Effective enforcement of collateral in the case of 

default (both seizure and disposition). 


The main challenges that LDCs face are: (i) lack of 

appropriate secured lending legal and regulatory 

frameworks; (ii) weak institutional capacity to manage 

a modern collateral registry system; (iii) limited 

knowledge on the importance of having solid secured 

Unleashing the Potential of Movable Assets as Collateral: 

the Cases of China and Mexico 

China - In 2005, China embarked upon a reform of its movable collateral framework to encourage financing against 

valuable movable assets. Before the reform, use of movable collateral, especially intangible collateral such as 

accounts receivable, under Chinese law was a key constraint for SME financing, as bank lending was largely based on 

real estate collateral, which SMEs typically do not possess. The reform model had three phases: development of the 

property law; creation of an electronic registry for accounts receivable and leases; and training of lenders to use 

movable assets as a basis for lending. Following China’s reform of a movable collateral framework and establishment 

of the receivables registry, SMEs can now use a wider range of assets, such receivables, as a basis for borrowing. In 

the three years (2008-2011) of operation of the new system, lenders have granted more than US$ 1.5 trillion in loans 

secured with receivables to more than 100,000 businesses, more than half of them SMEs. The reform of the systems 

has also led to the development of the leasing and factoring industries, which have grown substantially over the same 

time period. 

Mexico - Mexico has progressively introduced reforms in its secured transactions legal system over the past few years. 

But the reform that transformed the lending scenario for SMEs was the creation of a nationwide movable collateral 

registry in October 2010. With the new registry, the number of loans to businesses has increased by a factor of four, 

to around 23,000 in June of 2011. These 23,000 loans have generated more than US$70 billion in financing to businesses, 

SMEs accounting for more than 90 percent of the firms receiving those loans. The reform has also led to a 

cumulative estimated saving for borrowers of US$ 1.3 billion in registration fees associated to the registration of the 

security interest in the previous system. About half of the loans granted have gone to agri-businesses and farmers. 

Source: G20 Stocktaking Report, 2010; de la Campa, 2010.


29 

transactions and collateral regimes to promote access 

to credit; (iv) limited knowledge and/or appetite of 

financial institutions to offer movable assets based 

lending products; and (v) weak judicial systems, 

making enforcement of security interest an extremely 

challenging process. 

Based on these challenges, these countries should 

emphasize the following in their priorities of intervention 

and reform approach: 

(i) Creating awareness among the public and private 

sectors about the importance of solid, secured 

transactions and collateral regimes; 

(ii) Development of simple laws and regulations 

based on best practice principles, taking into 

account the local context and sophistication of 

the financial sector; 

(iii) Development of modern registries that are sustainable 

and cost effective according to the local capacity 

to maintain the operations of the registry; 

(iv) Strong focus on capacity and training of stakeholders 

on the reform, along with user training 

that focuses on financial sector and business 

community); 

(v) Development of out-of-court enforcement mechanisms 

and capacity building programs for judges 

and enforcement officers on different enforcement 

mechanisms for security interests. 

C.2.2. INSOLVENCY REGIMES 

Bankruptcy regimes regulate the efficient exiting of 

the market, and make the resolution of multiple creditors’ 

conflicting claims more orderly, resulting in more 

extensive opportunities for recovery by both the bankrupt 

entity and its creditors. Stronger creditor rights 

improve access to finance. Countries with stronger 

creditor rights tend to have a higher number of loan 

accounts per adult population and also higher rates of 

private credit to GDP. 35 

Insolvency frameworks in many countries possess significant 

legal gaps that leave them poorly suited to 

dealing with SMEs effectively. SMEs can be divided 

into two broad categories: corporates and non-corporates. 

Under most legal systems, corporates effectively 

limit the liability of shareholders to the amounts of 

their capital contributions to the business and, absent 

fraud or other mitigating circumstances, do not 

extend that liability to the ordinary debts of the business. 

Non-corporates, by contrast, do not possess a 

distinct legal identity from their shareholders and, as 

such, the debts of the business are the debts of the 

individual shareholders. 

Although the trend in insolvency reform has been 

towards the creation of a single, unified insolvency act 

that deals with all legal forms, most countries have not 

undertaken such reforms. Most legal systems either 

have severely outdated insolvency law provisions or 

have modern insolvency frameworks contained in 

companies acts that either do not apply to non-corporates 

and or include outdated or nonexistent personal 

insolvency provisions. 

Standards, Guidelines, Good Practice 

A modern framework for SME insolvency will start 

with legislation for corporate SMEs that will include 

“fast-track” and expedited bankruptcy provisions in 

unified or corporate bankruptcy laws. Additional 

frameworks for dispute resolution, such as mediation, 

might also be included to help improve efficiency. For 

the vast majority that are non-corporate, however, this 

will involve entirely new legal frameworks for personal 

insolvency or updates to personal insolvency legislation. 

Legislation on personal/SME insolvency 

should provide for: 

• A clear and transparent process by which entrepreneurs 

can seek to rescue their troubled businesses 

(including stays of proceedings and methods for 

making proposals to creditors for plans of 

arrangement); 

• A clear method for liquidating the business should 

the business fail, repaying creditors in a timely 

manner, and discharging the remaining debts; 

35 Djankov, McLiesh and Shleifer (2005)


• Clear protections for creditors, including lifetime 

limits on the number of times an individual entrepreneur 

can go bankrupt and punishments for 

fraudulent behavior; and 

• Equilibrium between debtor and creditor protection. 

The World Bank’s The Principles for Effective Insolvency and 

Creditor Rights Systems (the Principles) are a distillation of 

international best practices regarding design aspects of 

these systems, emphasizing contextual, integrated 

solutions and the policy choices involved in developing 

those solutions. 36 

Assessments using the Principles 

have been instrumental to the World Bank’s developmental 

and operational work and in providing assistance 

to member countries. These assessments have 

yielded a wealth of experience and enabled the World 

Bank to test the sufficiency of the Principles as a flexible 

benchmark in a wide range of country systems. 

The Principles address the following topics: legal framework 

for credit rights; risk management and corporate 

workout; legal framework for insolvency; and implementation 

of institutional and regulatory frameworks. 


Creditor rights, measuring the strength of the collateral 

and insolvency regimes, are relatively strong in 

the OECD and in Eastern Europe and Central Asia 

(ECA), but weaker in other regions, especially in 

MENA, Africa, and South Asia. In these regions, policy 

Insolvency regimes for non-corporate actors 

For non-corporate SMEs, the absence of a personal or “merchant” insolvency framework leaves the SME exposed on 

at least three fronts: 

1. SMEs that are fundamentally viable but find themselves in short-term liquidity crises have no safety valve for business 

distress. Where the legal framework is absent, the SME cannot seek temporary protection from its creditors, cannot 

propose a plan of reorganization, and cannot compromise debts in order to achieve greater returns to all creditors. 

2. The absence of an efficient, orderly, and transparent liquidation process to repay creditors and return productive 

assets into the economy as quickly as possible also leaves SMEs vulnerable. 

3. Where the legal framework is absent, individual owners of SMEs cannot obtain discharge from the SMEs’ debt. 

When an SME fails, its outstanding obligations will be the obligations of the individual entrepreneur, in perpetuity, 

unless specifically forgiven by creditors. 

The absence of these effective exit mechanisms inhibits entrepreneurship, limits the entry of SMEs into the market, 

and imperils the ability of creditors to be repaid. Not only are productive SME assets locked in a legal limbo for a 

longer period of time, delaying creditor repayment, but the absence of a debt discharge effectively inhibits the entrepreneur 

from re-entering the marketplace. Studies have tested the hypothesis that personal bankruptcy regimes 

stimulate entrepreneurship. They demonstrate that bankruptcy laws have the most statistically and economically 

significant effect on levels of self-employment across countries, and that more forgiving bankruptcy systems increase 

the supply of entrepreneurs. Four dimensions are considered in assessing how forgiving a bankruptcy regime is: 

(i) Availability of discharge (the release of outstanding debts owed by the debtor after liquidation of available assets) 

and time to discharge; 

(ii) Exemptions; 

(iii) Restrictions on debtor’s rights during bankruptcy; and 

(iv) Difficulty in reaching an agreement with creditors. 

Source: Uttamchandani, Menezes (2010) 

36 For more details, please see: http://www.wds.worldbank.org/external/default/WDSContentServer/WDSP/IB/2009/04/20/00033495 

_20090420051400/Rendered/PDF/481660WP0FINAL10Box338887B01PUBLIC1.pdf (as seen on May 17, 2011)


31 

interventions that strengthen the financial information 

infrastructure have the potential to expand SME financial 

access by reducing information asymmetries 

between SMEs and financial institutions and by facilitating 

the use of various lending technologies. 

In most LDCs, the vast majority of insolvency cases 

will result in the liquidation of the troubled enterprise, 

due in part to the relatively low value of SMEs in 

LDCs, which in turn reduces the incentive to restructure 

failing businesses. The prevalence of liquidation 

necessitates that one of the first orders of business in 

LDCs is the development of clear, predictable rules 

and processes to be followed when a debtor cannot 

repay its creditors, in order to foster greater confidence 

amongst potential lenders. These rules should 

address, inter alia, the financial conditions under 

which an insolvency process will be started with 

respect to a borrower, the process for liquidating 

assets to repay creditors, the role that creditors play in 

the liquidation process and in controlling the overall 

insolvency process, and the order of priority for distributing 

proceeds. 

A built-in constraint to the improvement of insolvency 

processes in LDCs can be weak court capacity. Since 

insolvency cases often require urgent treatment by the 

courts, the ability of courts in LDCs to hear cases 

quickly and render decisions based on commercial 

analysis and predictable legal principles will serve as a 

hard constraint to the overall improvement of the 

insolvency system. As such, tackling the issue of court 

competency, particularly as regards the ability of judges 

to deal with commercial issues in a practical and timely 

manner, is critical. At the same time, finding ways to 

reduce the dependence upon courts for the resolution 

of insolvency cases will likely increase both recoveries 

by creditors and the number of distressed businesses 

that are able to successfully reorganize and continue as 

going concerns. In these regions, policy interventions 

that strengthen the financial information infrastructure 

Example: Insolvency regime (Colombia) 

In 1999, as Colombia was in the midst of a financial 

crisis and facing a backlog of failing businesses entering 

a very inefficient bankruptcy process, the country 

undertook a reform of its bankruptcy code. This law, 

known as Law 550, streamlined the reorganization process 

by establishing shorter statutory deadlines for 

reorganization plans, reducing opportunities for appeal 

by debtors, and requiring mandatory liquidation in 

cases of failed negotiations. The pre-reform reorganization 

process was so inefficient that it failed to separate 

economically viable firms from inefficient ones. 

Once it was reformed, the country’s insolvency system 

managed to separate viable from nonviable enterprises, 

allowing the former to restructure and liquidating 

the latter. By substantially lowering reorganization 

costs, the reform improved the selection of viable firms 

into reorganization, and increased the efficiency of the 

bankruptcy system. 

Source: Giné and Love (2006) 37 

have the potential to expand SME financial access by 

reducing information asymmetries between SMEs and 

financial institutions and by facilitating the use of various 

lending technologies. 

C.2.3: CREDIT INFORMATION SYSTEMS 

Credit reporting systems help satisfy lenders’ need for 

accurate, credible information that reduces the risk of 

lending and the cost of loan losses by providing a reliable 

indication of whether an applicant will repay a 

loan. Research indicates that bank lending is higher 

and credit risk is lower in countries where lenders 

share information, regardless of the private or public 

nature of the information-sharing mechanism. Wellfunctioning 

credit reporting systems reduce adverse 

selection and moral hazard, and can contribute to both 

an expansion of credit and a reduction in lending costs 

by facilitating the adoption of lending technologies 

based on credit scoring models. The development of 

37 For further information, see Giné, Xavier and Love, Inessa, Do Reorganization Costs Matter for Efficiency? Evidence from a Bankruptcy 

Reform in Colombia (2006). World Bank Policy Research Working Paper No. 3970; available at http://siteresources.worldbank.org/DEC/ 

Resources/Do_Reorganization_Costs_Matter_for_Efficiency-8Jul09.pdf


credit registries and bureaus is particularly important 

for smaller firms, given the more severe problems of 

information opacity and asymmetry in these cases. 

Credit reporting systems comprise Public Credit 

Registries (PCRs) and Private Credit Bureaus (PCBs), 

and play two key functions in a financial system: they 

support banking supervision, and they promote access 

to finance by reducing risks for lenders. Supervisors 

make use of credit reporting systems to predict bank 

portfolio performance. Lenders make use of credit 

reporting systems to screen potential borrowers and 

monitor their performance. In the absence of solid 

credit information, lenders adopt defensive positions, 

requiring substantial collateral, increasing interest 

rates, or rationing credit altogether, thereby hindering 

the growth of segments like SMEs. 

Assessing borrower creditworthiness is a major part of 

the cost of assessing a loan, therefore an effective credit 

reporting system can also reduce a lender’s operating 

costs substantially. These cost savings dramatically 

reduce the size at which a loan becomes profitable, 

thereby improving access to credit for small borrowers. 

Credit reporting systems may also facilitate noncollateralized 

lending by providing sufficient 

information about a borrower’s credit repayment history 

to offset, or reduce, the need for physical collateral. 

PCBs that incorporate “positive” credit history 

data have proven to be a valuable tool in the prevention 

of over-indebtedness. Without such information, lenders 

find it difficult to evaluate the total level of existing 

indebtedness that an individual or business has when 

they make an application for a new facility, often 

resulting in some individuals receiving too much 

credit that ultimately they cannot service – the 2002 

credit card crunch in Korea is an excellent example of 

the dangers of rapid credit expansion without access to 

detailed credit history information 38 . 

A public credit registry is a repository of data collected 

by the central bank or other financial regulator 

that incorporates information from banks and regulated 

financial institutions primarily for the purposes 

of offsite supervision. Over time, however, many 

PCRs have evolved into becoming information providers 

as well as supervisors by returning the collected 

data back to lenders in the form of basic credit 

reports. The provision of data to a PCR is almost 

always a mandatory requirement for regulated financial 

institutions. Such systems have the advantage of 

being able to compel banks to provide data that they 

may otherwise not wish to share. These systems are 

typically limited in scope and data coverage, and 

seldom collect information from outside the regulated 

banking sector. 

A private credit bureau is an organization that collates 

data from a broad range of financial institutions (banks, 

non-bank financial institutions, utility companies, telecoms, 

etc.), then distributes it back to participating 

members through a common information-sharing 

mechanism (e.g., Experian, Equifax, Trans Union, CRIF, 

etc.). Lenders provide information about their clients to 

the credit bureau, including details of the loan and its 

repayment, on a voluntary reciprocal basis. These businesses 

also market a suite of value added products, such 

as credit scoring solutions, fraud prevention services, 

software applications, and consultancy services. PCBs, 

therefore, typically have a far greater coverage of the 

financially active market and provide a greater range of 

products and services than can be offered through a 

PCR. However, in some markets PCBs suffer from the 

voluntary nature of the data submission. For example, 

in emerging markets there is often considerable resistance 

from lenders to participate in PCBs on the grounds 

of competition and data security. 

A third category of credit information service providers, 

Commercial Credit Bureaus (e.g., Dun and 

Bradstreet), cater to the needs of lenders, insurers, and 

business-to-business enterprises. Commercial credit 

bureaus fill a gap in the market that neither the PCRs 

nor PCBs have successfully serviced. The business 

38 See Kang and Ma “Credit Card lending distress in Korea in 2003”, available at http://www.bis.org/publ/bppdf/bispap46k.pdf


33 

model is similar to that of the PCBs, but commercial 

credit bureaus also undertake more detailed investigative 

assessments of larger businesses. Like PCBs, they 

operate on a voluntary data submission basis but 

seldom seek reciprocity. The importance of this group 

of information service providers has been highlighted 

in recent times by the increasing demands of lenders 

for more information on SME businesses. A large 

number of SMEs have never borrowed from the formal 

banking sector and therefore have no track record in 

either the PCR or PCB, although small businesses borrowing 

in the name of the entrepreneur rather than in 

the business name can often be found in these databases. 

Many of these SMEs do, however, make regular 

use of trade credit, details of which can, typically, only 

be sourced through commercial credit bureaus. This 

history of trade credit is considered to be a key component 

in improving the risk assessment tools (scoring) 

for small businesses. 

Credit Scoring is a statistical method of evaluating the 

probability of a prospective borrower to fulfill its 

financial obligations associated with a loan. The predictive 

value of credit scores is generally higher than 

that of assessments derived from credit histories alone, 

especially when applied to an identified and homogeneous 

group of borrowers or with regard to a specific 

product. Initially, credit scores were applied to individuals. 

However, the use of credit scoring techniques 

has come to be extended to other borrowers, including 

SMEs. 

Standards, Guidelines, Good Practices 

A key task is to consider measures ensuring that the 

credit reporting service providers collect sufficient, relevant, 

and usable data. Mandatory data collection and 

data access can help promote the rapid build-up of coverage 

and, with appropriate oversight, facilitate a more 

reliable database. Credit reporting systems are most 

effective when their data are electronically accessible, 

available in real time, and based on credit information 

that is current and easy to process. In a developing 

country context, where the information environment 

Success Factors 

A credit registry or bureau will be more effective to the 

extent that it: 

• collects all relevant information, including both positive 

and negative information from regulated and nonregulated 

institutions (e.g., utilities, retailers); 

• processes information in a safe and reliable manner 

keeping information accurate, updated, and complete; 

• builds credit histories and other additional value added 

services for a large number of potential borrowers; and 

• processes comprehensive credit reports in a timely and 

cost-effective manner. 

In the G20 Stocktaking Report, success factors mentioned 

by credit bureau cases share similar trends, 

including: 

(i) an active exchange between the agencies that 

collect data and the suppliers to maintain an updated 

database; 

(ii) the use of non-traditional data sources to assess a 

company’s credit risk; and 

(iii) increasing or recurring use of the database by the 

financial sector. 

Source: G-20 Stocktaking Report, 2010 

is particularly weak, there is a need to start collecting 

information from all relevant players inside and outside 

the financial services industry, including microfinance 

institutions, banks, non-bank financial institutions, 

utilities, and retailers. Credit bureaus should be encouraged 

to provide additional services, such as credit 

scores. Finally, credit reporting service providers should 

be able to effectively identify borrowers, which may 

necessitate inter-governmental cooperation in order to 

allow access to public record data. 

The legal and regulatory framework should be clear, 

predictable, non-discriminatory, proportionate, and 

supportive of consumer rights. Regulatory measures 

should be flexible and dynamic enough to allow adjustments 

to changes in the credit reporting area. Some of 

the key elements that should be included in a credit


reporting legal and regulatory framework are: (i) 

clearly established scope of data and type of data contribution; 

(ii) inclusion of all relevant and available 

data (positive and negative data related to individuals 

and to businesses); (iii) participation of non-regulated 

entities; (iv) responsibilities and liabilities of each participant; 

(v) data that is detailed at the account level; 

(vi) historical data; (vii) consumers’ rights, such as the 

right to object to their information being collected, the 

right to be informed, the right to access data, and the 

right to challenge data. 

Credit scoring models may be applied to the analysis 

of credits to both individuals and businesses. When 

applied to individuals, personal information and the 

behavior of consumers are used. When applied to 

businesses, financial indicators are the variables used 

to determine the probability of insolvency. The basic 

approach for the development of a type of credit scoring 

model involves the following steps: 

• Planning and definitions: markets and credit products for 

which a system will be developed; purposes for 

which the products will be used; types of custom- 

Good Practice Examples 

Credit Bureau - Credit Bureau Singapore (Singapore) 

The Credit Bureau Singapore was created in 2002 as the country’s first commercial credit bureau, with the objective 

of helping lenders make faster and better-informed credit decisions. Credit Bureau Singapore (CBS), with support 

from the Government of Singapore, recognized at the beginning of the financial crisis that lending to SMEs was 

tightening and additional tools were needed to reduce information asymmetry. CBS is one of the few private credit 

bureaus in Southeast Asia that collates data with respect to both consumers and businesses. Through its association 

with Dun & Bradstreet, CBS has access to the trade credit data of thousands of Singaporean companies. In May 2010, 

CBS, in association with Fair Isaac Corporation, launched a custom credit scoring solution designed to accurately 

quantify the risk (probability of default) associated with SMEs’ applications for credit. The algorithm behind the 

score incorporates credit history data from the business, including trade credit experience, and blends this with the 

personal credit history of the business owner and/or key stakeholders. This form of blended score is especially useful 

when assessing the risk profile of smaller businesses, where detailed financial information is either not available or 

often unreliable. 

Companies Database - FIBEN Companies Database (France) 

FIBEN is a corporate database set up in 1982 and managed by the Banque de France to facilitate the implementation 

of monetary policy and to verify the credit quality of bills issued for rediscounting. Credit institutions and public 

economic bodies have access to the FIBEN database, which contains data necessary for the analysis of credit risk 

(identity, legal event, management, indebtedness, financial appraisal by the Banque de France), serving as an important 

tool for analyzing risk, making decisions, and monitoring companies. Companies may also gain access to refinancing 

through the banking system, using private bills as collateral and supported by the central banks’ payment 

systems operations. As of November 2009, the total amount of credit to SMEs in France was USD 262.4 billion. 

Credits granted by the banking sector to SMEs increased by over 1.9 percent between November 2008 and November 

2009, whereas credits granted to the private sector in general decreased by 0.9 percent over the same period. 

Credit Registry – Bank Negara (Malaysia) 

Following the Asian financial crisis in 1997, Bank Negara (Malaysia) recognized the importance of sharing credit data 

as a means to improve the quality of lending decisions and prevent over-indebtedness. As such, the bank initiated 

the Central Credit Reference Information System (CCRIS) project, which today provides perhaps the most comprehensive 

repository of financial data in the region. The data set incorporates information on both individuals and 

companies, and is used by practically all lenders in Malaysia. The CCRIS database is among the best examples of a 

modern public registry, but while it adequately serves the needs of the retail sector, it has its limitations in the SME 

sector. Recognizing these weaknesses, Bank Negara is exploring ways to develop more SME-centric services in 

cooperation with the Credit Guarantee Corporation of Malaysia and the private sector.


35 

ers; concept of nonperforming; horizon for forecasting 

model; 

• Identification of potential variables: characterization of the 

credit proponent; characterization of the operation; 

selection of significant variables for the model; analysis 

of the restrictions to be considered in relation to 

the variables; 

• Planning sample and data collection: selection and dimension 

of the sample; collection of data; assembly of 

the database; 

• Determination of scoring formula through statistical techniques: 

for example, discriminant analysis or logistic regression; 

and 

• Determination of the cut-off point from which the customer is 

classified as delinquent or good payer: the point from which 

the financial institution may approve the credit. 

Some countries, such as India, have introduced SME 

rating agencies and/or specialist PCBs as additional 

institutions designed to generate and provide more 

information to prospective lenders. This is a relatively 

recent initiative that merits consideration by other 

countries. There are some critical issues that need to be 

revisited, such as the level of independence of the ratings 

provider (like those observed in the case of credit 

rating agencies). It is also possible that these agencies 

require a critical size of market to break even and 

become profitable. If this is the case, DFIs and governments 

could consider regional solutions, involving 

regional hubs that are large enough to dilute fixed costs, 

but that also contain expertise at the country level. 

The World Bank’s International Standards on Credit 

Reporting (see Annex III) provide an internationally 

accepted framework for credit reporting systems’ 

policy and oversight. They are intended to serve as a 

guide for policymakers, regulators, banking supervisors, 

credit reporting data providers, credit reporting 

service providers, the users of the services, and individuals 

whose data is stored in these systems. The standards 

are based on the development of principles, 

guidelines, and roles for each participant in the system 

Example: SME Rating Agency of India 

(SMERA) 

India’s SMERA is the country’s first rating agency focusing 

on the MSME sector, providing comprehensive ratings 

for the use of financial institutions in the assessment 

of credit. The government of India initiated the creation 

of SMERA in 2005, in coordination with other stakeholders, 

including 11 public and private financial institutions 

exposed to SMEs, in order to improve credit flow 

to the MSME sector. Diversified equity ownership by 11 

banks enabled the lenders to accept SMERA’s ratings 

and extend both financial and non-financial benefits to 

well-rated SMEs. SMERA ratings categorize MSMEs 

according to size, so that each MSME is evaluated 

among its peers. The pricing policy aims to keep fees 

affordable for SMEs. The rating fee does not exceed 

USD 1,155, for which the government provides a 75 percent 

rating fee subsidy. SMERA has completed over 

6,500 ratings. The ratings have improved access to 

bank financing for at least 20 percent of rated clients, 

and collateral requirements have decreased in 10 percent 

of rated cases. A rating renewal in 20 percent of 

cases indicates usage of ratings for monetary benefit as 

well as a self-improvement tool. By the end of 2011, 

SMERA operations are expected to generate profits of 

15 percent, and to have reached over 80,000 SMEs. 

ensuring a comprehensive framework for the development 

of an efficient, safe, and reliable national credit 

reporting system. 


In general, credit bureau coverage in developing 

regions is much lower than the average of the OECD. 

Credit bureau coverage in Sub-Saharan Africa and in 

South Asia is particularly weak. However, the existence 

of credit registries and bureaus seems to matter more 

in developing countries, suggesting a more important 

role for the government in promoting informationsharing 

in these countries. 39 

While the challenges faced in LDCs are often similar to 

those of other markets, the barriers to sharing credit 

39 Djankov, S., C. McLiesh, and A. Shleifer. 2007. “Private Credit in 129 Countries.” Journal of Financial Economics, May 2007, available at: 

http://ideas.repec.org/p/nbr/nberwo/11078.html .


information tend to be more concentrated. In particular, 

LDCs tend to disproportionately suffer from the 

following market failures: 

• Weak Legislative environments: The concept of sharing 

information about individuals and businesses incorporates 

a delicate balance between what is in the best 

interests of the financial system as a whole and the 

right to privacy of the data subjects, and to some extent 

the data providers (confidentiality). Typically, LDCs 

tend to have weak or nonexistent legislative regimes in 

the area of data privacy and, by default, tend to regulate 

in favor of confidentiality, an example being the 

banking secrecy provisions commonly found in central 

banking regulations. As such, these legislative 

frameworks actively prevent widespread sharing of 

useful data and provide legal “cover” for those institutions 

that see the sharing of such data as diminishing 

their competitive advantage. Specific regulations governing 

the operations of the credit information sharing 

environment or the removal of pre-existing 

constraints, such as amendments to banking regulations, 

can help alleviate these constraints. 

• Market concentration and anti-competitive behavior: LDCs, 

and in particular smaller nations, tend to have a far 

greater concentration of suppliers than do more 

developed countries, often with one or two dominant 

lending providers. In these circumstances, the 

business case for sharing information is less obvious, 

and dominant suppliers view the sharing of 

information and the possible resulting loss of market 

share as a threat rather than an opportunity. In these 

environments it may be necessary for policymakers 

to take a more pro-active role and compel participation 

in such infrastructure (either public registries 

or private credit bureaus). 

• Size-related sustainability issues: Smaller nations also 

suffer from the inherent cost dynamics of developing 

such infrastructure. While the cost of potential 

solutions can vary considerably, there remains a base 

level “entry cost” of technology and personnel to 

satisfy minimum data security and operational risk 

requirements. The size of the active credit market 

will subsequently determine the cost, or subsidy, of 

providing the service and its ultimate sustainability. 

One method of overcoming these constraints is to 

consider the development of regional solutions that 

share common infrastructure. This, however, 

requires cross-border cooperation at the policy level, 

which adds an additional layer of complexity. 

• Institutional capacity constraints: Credit information sharing 

mechanisms are undoubtedly a valuable tool in 

reducing information asymmetry, and thereby reducing 

the costs of loan losses and acquisition, but they 

are not in themselves a means of preventing such 

events. The tool is only as good as its operator, and the 

recent global financial crisis has demonstrated that 

the mere existence of these data sources may not prevent 

reckless lending practices. Many LDCs suffer 

from an inherent lack of skilled resources in the 

financial sector, which can lead to capacity constraints 

when it comes to adopting new tools and methodologies. 

The introduction of financial infrastructure, 

therefore, has to be seen in the context of a broader, 

more holistic, capacity development agenda. 

• Data quality and data matching constraints: The quality of 

raw data at the institutional level is often incompatible 

with the needs of the information service providers. 

In this respect, there are various policy 

interventions that can have a profoundly beneficial 

impact on the development of the infrastructure. 

These could range from a very simple intervention 

from the central bank to compel all lenders to capture 

specific pieces of information, through making 

public record data available to the information service 

providers, such as the ID verification service, to 

more general national reforms, such as the enforcement 

of a common address format and the introduction 

postal (ZIP) codes at the address level. 

C.2.4: PAYMENT SYSTEMS 

Payment, clearance, and settlement systems are the 

means by which payments are made between system 

participants (mainly banks), within and across borders. 

A payment system represents a market infrastructure 

for the financial industry and is a basic foundation 

for the conduct of commerce without an exchange of 

physical cash or (increasingly) paper, such as checks.


37 

Without a payment system that is sufficiently effective, 

efficient, stable, and competitively neutral to elicit 

confidence on the part of the banks that use it, modern 

modes of carrying out financial transactions would be 

impossible, or at least very costly. 

Most SME businesses conduct business using cash. 

However, cash is subject to loss, theft, and destruction 

in a multitude of ways. Payment, clearance, and settlement 

systems that are effective, efficient, and stable 

encourage entrepreneurs to move into the formal 

economy and facilitate their relations with banks. 

The infrastructure to support corporate payment and 

retail payments can also play a role in scaling up SME 

access to financial services and reduce the costs of 

doing business. Payment system service providers have 

developed a number of products to facilitate “corporate 

payments” in the entire value chain of doing business. 

SMEs rely on the retail payment infrastructure for 

their customers to discharge their obligations as well. 

Both segments are relatively less developed for SMEs 

than for larger corporations. 

Standards, Guidelines, and Good Practices 

A wide range of cost-effective payment instruments is 

essential for supporting economic development and 

customers’ needs in a market economy. The development 

of a country’s commercial, industrial, and 

financial sectors generally increases demand for 

greater diversity and use of non-cash retail payment 

instrument and services. Migrating cash-based payments 

to electronic payment mechanisms 40 like electronic 

funds transfers, card payments, and mobile 

payments would lead to important savings while 

expanding reach and increasing inclusion. Payment 

system reform initiatives would need to focus, therefore, 

on extending the availability and choice of efficient 

and secure non-cash payment instruments and 

services to consumer and businesses. 

It is important that public authorities develop a 

coherent and holistic reform strategy. The World 

Bank is in the process of issuing Guidelines for 

Developing a Comprehensive Retail Payments 

Strategy. Such guidelines are based on clear public 

policy objectives that need to guide the policies 

and actions of national authorities in countries 

with under-developed retail payment systems. Key 

public policy objectives are: (i) safety and efficiency; 

(ii) affordability and ease of access to payment 

instruments and services; (iii) availability of 

an efficient infrastructure to process electronic 

payment instruments; and, (iv) availability of a 

socially optimal mix of payment instruments. 

These public policy goals should guide the actions 

of the public authorities, specifically the central 

bank, to positively impact the drivers of retail payment 

system development. 

To implement such goals, regulatory authorities should 

consider using the following guidelines in designing 

their retail payments development agenda: 

Guideline I: The market for retail payments should be 

transparent, have adequate protection of payers and 

payees interests, and be cost-effective. 

Guideline II: Retail payments require certain underlying 

financial, communications, and other types of 

infrastructure; these infrastructures should be put 

in place to increase the efficiency of retail payments. 

These infrastructures include interbank 

electronic funds transfer systems, inter-bank card 

payment platforms, credit bureaus, data-sharing 

platforms, interbank real-time gross settlement systems, 

reliable communications infrastructure, and 

a national identification system for individuals. 

Guideline III: Retail payments should be supported 

by a sound, predictable, non-discriminatory, and 

proportionate legal and regulatory framework. 

40 The adoption of the electronic payment mechanisms ranges from less than 1 transaction per capita in Africa, to more than 150 in 

high-income countries.


Development initiatives in retail payment infrastructure 41 

Automated and standardized payment transaction infrastructure: Electronic communication networks, such as 

those for various types of card payments and for telebank and internet payments, allow SMEs real-time initiation and 

authorization of retail payments. Common initiatives for developing these networks include: 

(i) Creation of standardized transaction processes for paper-based instruments; 

(ii) Introduction of electronic payment transaction networks that lower user costs; and 

(iii) Introduction of technologies and processes that digitize or electronically image paper instruments for electronic 

clearing and settlement. 

Interoperability among transaction infrastructures: The interoperability or consolidation of transaction infrastructures 

can achieve scale and scope economies and reduce SME user cost with: 

(i) Adoption of common standards for instruments, communication, and transmission security for all networks to 

provide interoperable services; 

(ii) Facilitation of interconnectivity among proprietary network arrangements, notably ATM and electronic funds 

transfer at point of sale (EFTPOS) networks; and 

(iii) Adoption of common equipment (e.g., hardware and switch) and software standards to allow interoperability at 

point of sale (i.e., ATMs, card readers, internet connectors) among competing networks. 

Interoperable and automated retail payment clearing and settlement infrastructures: Achieved through common 

interconnected information technology and often through actual centralization or consolidation of existing arrangements. 

Common initiatives for developing these infrastructure arrangements include: 

(i) Establishment of national or regionally interconnected automated clearinghouses to improve the speed and 

reliability of retail payments; and 

(ii) Interoperability or centralization of inter-branch and inter-bank clearing and settlement through regional and 

national centers. 

Guideline IV: The retail payments industry should foster 

competitive market conditions, with an appropriate 

balance between cooperation and competition. 

Guideline V: Retail payments system should be supported 

by appropriate governance and risk management 

practices. 

Guideline VI: Public authorities should exercise 

effective oversight over the retail payments 

market and consider direct interventions where 

appropriate. 

Standard setters and implementation agencies have 

provided a useful framework to guide reforms in 

retail payment instruments and systems. In particular, 

the CPSS 42 has identified a set of overall strategic 

goals and objectives for retail payment systems, 

based on the key public policy objectives of efficiency 

and reliability. In the specific context of 

countries with underdeveloped retail payment systems, 

a few additional public policy goals are necessary 

to provide a firm foundation for successful 

system development. 


Preliminary results from the World Bank Global 

Payment Systems Survey show very large differences 

between higher-income and lower-income countries 

41 CPSS, 2006 

42 BIS, CPSS, “Policy Issues for Central Banks in Retail Payments”, Basel, Switzerland, March 2003.


39 

with regard to retail payment systems. While in most 

high-income countries any single individual performs 

on average 100 or more cashless transactions per year, 

this same indicator is less than 1 in many low-income 

countries. These disparities are attributed to the slow 

development of infrastructure and access channels for 

electronic payments in most developing countries; 

limited development of the internal payments system 

in corporates, banks, and financial service providers; 

and limited competition and an absence of specific 

strategies for addressing these issues. 

According to World Bank experience, key constraints 

that inhibit the faster development of non-cash payments 

in developing economies include limited 

interoperability of the various sub-systems; limited 

competition and innovation in the banking industry, 

which typically results in higher costs and limited coverage 

of these services; limited financial access; and 

lack of knowledge and trust in the benefits attached to 

the use of electronic payment systems and instruments. 

As an example, only 10 percent of low-income 

countries surveyed in the context of the Global Payment 

Systems Survey have indicated that automated teller 

machines (ATMs) are fully interoperable, compared to 

78 percent of high-income countries. Along the same 

lines, 25 percent of low-income countries perceive the 

cost of ATM withdrawals at another bank as high, 

against 15 percent of high-income countries. Such 

results, when seen in conjunction with ATM costs that 

are significantly higher per capita in higher-income 

countries than in lower-income countries, indicates an 

even lower level of utilization of the infrastructure in 

low-income countries. 

Governments and regulators in LDCs need to play a proactive 

role in retail payment systems in terms of stimulating 

demand, catalyzing and co-coordinating action, 

and establishing appropriate regulation and oversight of 

retail payments system. In addition to safety and efficiency, 

at least three additional policy goals should be 

considered by countries with particularly underdeveloped 

retail payment systems: i) affordability and ease of 

access to payment instruments and services; ii) availability 

of an efficient infrastructure to process electronic 

payment instruments; and iii) availability of a socially 

optimal mix of payment instruments. 

C.2.5: EQUITY INVESTMENT 

Most equity funding of SMEs around the world comes 

from two sources: retained earnings, and capital provided 

by savings, friends, family, groups of related companies, 

and other “angel” investors. Formal provision of 

equity capital is rare, due to principal/agent problems 

such as information asymmetry, adverse selection, and 

high monitoring costs. Essentially, most formal providers 

of equity capital do not achieve sufficient riskadjusted 

returns to make the provision of additional 

capital worthwhile. Likewise, the costs of discriminating 

between attractive and other investments in young 

firms are high, relative to the size of the investments. 43 

Two different sources of potential equity financing have 

been proposed to bridge the equity gap: i) private equity 

and venture capital vehicles (including equity funds and 

equity programs sponsored by government-sponsored 

development finance institutions); and ii) programs to 

raise equity in “development markets” on special stock 

exchange tiers. Each approach has a number of challenges, 

especially in low-income countries. 

Venture Capital/Private Equity (VC/PE) organizations 

support the expansion and development of companies 

in their growing cycle, addressing some of the 

financing needs of high-growth firms that are not covered 

by traditional financiers. By intensively scrutinizing 

firms before providing capital (i.e., due diligence), 

then monitoring them afterward, VC/PE can alleviate 

information gaps and reduce capital constraints. This 

asset class contributes to reduce information asymmetries 

through improved monitoring and control, 

43 Towards An Understanding Of Public Policy Measures To Encourage The Supply Of Private Equity And Venture Capital: Framework And 

Country Lessons, Clemente del Valle, Alex Lima, and Jorge Gomes, Unpublished paper February 2008.


relying on increased hands-on management of the 

portfolio companies compared to a bank lender. This 

allows companies with good growth prospects to 

secure risk capital financing that would otherwise be 

very difficult to obtain. 

There are advantages for firms to have venture capital 

(VC) investors, such as the influence of professional 

and foreign board members on corporate governance, 

the establishment of oversight and audit committees 

(or provision of mentoring, for smaller 

SMEs), and the hiring of better CEOs. VC financing 

can foster innovation, patenting, and growth performances, 

and VC firms can professionalize their portfolio 

companies, connecting them with potential 

clients and suppliers, and attracting additional funding. 

However, this type of financing is only available 

(if at all) to companies with high growth potential 

where existing shareholders are willing to share 

ownership for the sake of increased growth and/or 

other non-financing benefits (e.g., access to knowledge, 

markets, etc.). 

Equity funds are pooled investment vehicles that 

invest in unlisted equity, quasi-equity and, occasionally, 

debt securities. There has been an increase in participation 

in SME equity funds in emerging markets in 

recent years. Over the last decade, DFIs have expanded 

their participation in SME equity funds, and evidence 

suggests that there are close to 200 investment funds 

supporting small and growing businesses (SGB) in 

emerging markets. 

Some countries have also created SME stock exchanges 

to facilitate access to public funds, although the performance 

of these exchanges has been mixed. 44 Over 

the years, many developed and developing countries 

have sought to address the issues faced by SMEs by 

establishing dedicated stock exchanges, junior market 

segments, or separate trading platforms exclusively 

for the SME sector, with the aim of facilitating access 

to capital markets more quickly, with less stringent 

eligibility criteria, and at a lower all-in cost. However, 

the performance of many of these junior exchanges, 

particularly those in lower-income countries, has 

been unimpressive, with only a handful of SMEs electing 

to list on certain markets and with little or no new 

capital actually being raised. Notable middle-income 

and high-income country examples include the 

Alternative Investment Market (AIM) in London, the 

Growth Enterprises Market (GEM) in Hong Kong, 

KOSDAQ in Korea, MESDAQ in Malaysia, TSX in 

Canada, the MOTHERS market in Japan, and the 

Shenzhen SE in China. 

Standards, Guidelines, and Good Practice 

The government’s role is to improve the environment 

for private equity funds and VC investors, such as 

removing tax penalties on VC capital gains and formalizing 

the private placement market, as an alternative 

exit strategy. In general, access to equity markets can 

be increased by improving corporate governance 

through a broad range of interventions: 

• Improvements in minority shareholder protection, 

providing a more secure and attractive environment 

to investors. This requires the implementation of 

international standards in basic shareholder rights, 

reduced thresholds for shareholder actions, and 

increased liability for CEOs and directors. 

• The creation of a stronger domestic institutional investor 

base and greater participation of foreign investors, 

which may require the relaxation of limits on foreign 

ownership of listed companies in some countries. 

• Enhancing the role of the board of directors and 

clarifying their responsibilities, and introducing 

independent members of the board, sometimes 

through the creation of a code of good practice. 

• For larger firms, improvements in disclosure – 

improved financial reporting, use of board audit 

committees comprising independent directors to 

oversee auditors, and improving non-financial 

44 OECD (2006) provides a comprehensive review of equity finance in the early stages of the life cycle.


41 

disclosures, to include management’s discussion and 

analysis of financial results in the annual report and 

governance standards. 

Private equity / venture capital 

The expertise and profit-seeking instincts of professional 

fund managers are essential to the development 

of a sustainable private equity sector. Successful programs 

such as SBIC (US), ECF (UK), Yozma (Israel), IIF 

(Australia), and Inovar (Brazil) have had a lasting 

effect on the industry and on the innovative infrastructure 

of those countries. 

Actions that could be taken include: 

• Liberalizing investment restrictions on local institutional 

investors, allowing a VC/PE industry to tap 

into national savings in search of opportunities for 

diversification and improved returns. This is closely 

related to a balanced supervision of investment vehicles 

and fund managers by regulators. 

• Establishing a conducive tax framework for entrepreneurs 

and institutional investors, designed to enable 

and stimulate entrepreneurship and the investment in 

productive risk taking activities, including the introduction 

of investment vehicles with tax pass-through 

capability and a differential fiscal treatment of the 

capital gains earned PE/VC firms, which acknowledges 

the high risk faced by investors. 

• Reducing capital controls on the repatriation of longterm 

foreign capital gains and improving protection 

and rights of VC/PE investors’ contributions in order 

to increased foreign investment. This includes regulation 

of minority investors’ rights, and standards of 

disclosure and fund management. 

• Liberalizing regulation. The professional nature of the 

investors in this asset class requires less protection from 

regulators, allowing for potentially higher returns. 

More flexibility should be provided in comparison to 

other asset management firms (e.g., mutual funds) that 

invest capital from the general public. This includes 

portfolio valuation and reporting requirements. 

• Building professional expertise, a key to the development 

of the VC/PE industry. This is even more critical 

in developing countries, given the relative shortage 

Example: Developing private equity / 

venture capital markets 

The Inovar Program in Brazil was designed in 2001 by 

Financiadora de Estudos e Projetos (FINEP), which provides 

funding to strengthen technological and scientific 

development in Brazil, in coordination with the Inter- 

American Development Bank. The objective of the program 

is to support the development of new, SME 

technology-based companies through the establishment 

of a venture capital (VC) market and to enhance 

private investment in technology businesses. Inovar 

created a research/knowledge and information dissemination 

platform and develops managerial capacity for 

channeling and accelerating VC investments in smallcompany 

funds in Brazil. The program successfully 

achieved the creation of a VC portal with information on 

how to register for different program components, with 

over 2,650 registered entrepreneurs, and over 200 

investors. It also established a Technology Investment 

Facility where investors can perform joint analyses and 

due diligence on VC finds, which resulted in over 50 

joint due diligences with approximately USD 165 million 

committed/approved in 15 VC funds. The program has 

also established 20 venture forums for SMEs to interact 

with potential investors and present business plans, 

resulting in 45 SMEs receiving over USD 1 billion in VC/ 

PE investments. 

Source: G-20 Stocktaking Report, p. 73 

of such specialize resources. Potential policy options 

in this area include: promoting and funding education 

and training initiatives at national and international 

settings; encouraging the teaming of 

international general partners (e.g., Yozma program 

and some IFC funds); and allocating resources to 

funds managed by new managers. 

• Indirect intervention through market-based 

approaches, which, given the experience in a 

number of countries, is preferred to direct equity 

investments on the part of government agencies. 

• Calibration of incentives for risk sharing and return 

allocation, where the design of co-investment programs 

involves a combination of government and private 

sector financing.. The preferred capital structure 

is one where the government as investor adopts a


The Benefits of and Experience with Private Equity Funds 

The benefits of private equity funds can be assessed from different perspectives. At the macro level, private equity 

can catalyze structural changes through support to new economy sectors and foster industrial innovation. 45 It can 

help reduce unemployment rates, mainly for skilled workers, 46 and spur overall employment growth. 47 Industries with 

private equity investments grow faster in terms of production, value added, and employment, while at the same time 

exhibiting more resilience to industry shocks. 

Employment and sales growth rates reported for random samples of exited deals in South Africa, Tunisia, and 

Morocco support the perception that private equity fund-backed businesses grow faster and create more jobs than 

those without private equity fund support. South African businesses that were backed by private equity funds grew 

their sales by 20 percent, outperforming Johannesburg Stock Exchange (JSE) listed companies and companies 

included in the All Share Index ALSI by 2 and 6 percent, respectively 48 (). Similarly, these private equity fund-backed 

companies reported employment growth rates significantly superior to regional rates estimated at 2.88 percent for 

North Africa and 2.98 percent for sub-Saharan Africa. The involvement of private equity funds in African businesses 

seems to foster innovation as well. For instance, 69 percent of private equity fund-backed companies introduced 

new products and/or services. The annual growth rate of R&D in private equity fund-backed businesses was 7 percent, 

seven times the rate reported for JSE listed companies over the same period 49 . 

“Financing Africa Through the Crisis and Beyond” Beck et al,2011; Bernstein et al., 2010. 

position akin to that of a limited partner. An armslength 

relationship prevents government involvement 

in the management and asset allocation of the fund. 

• In public/private investment programs, the adoption 

of asymmetric allocation of returns rewarding private 

investors beyond their share at the expense of 

government returns. This type of added incentive 

can provide a valuable incentive to private sector 

participation and has been used in the context of the 

investments by international development institutions, 

like the IFC. 

Equity funds: In general, deal flow and exit opportunities 

in most of the smaller emerging countries are 

too limited to support dedicated single-country 

funds. Thus, successful SME fund models usually 

cover more than one country, with a small central 

team and local management teams in each country. 

This structure allows the local teams to focus on 

investments while spreading overhead costs over as 

broad a base as possible. The central platform shortens 

the learning curve for the local teams and provides 

necessary services and support in an efficient 

and cost-effective way. 

SME Stock exchanges: Setting up SME stock exchanges 

or junior markets can further improve the supply of 

equity investment to SMEs, although most are not considered 

successful. Establishing a trading platform and 

equipping it with modern systems and infrastructure 

is in itself no guarantee of success; improvements to 

the wider enabling environment for capital markets 

are necessary. The SME exchanges that have succeeded 

globally are those where: (i) the underlying legal and 

capital market regulatory frameworks are reasonably 

well-developed, robust and, above all, trusted by 

investors; (ii) access to credible corporate information 

on SMEs is widely and readily available; (iii) a reasonably 

broad spectrum of early-stage equity capital is 

available from angel, venture capital, and private 

45 Kortum, S. and J. Lerner, 2000. 

46 Rainer Fehn & Thomas Fuchs, 2003 

47 Belke, A.; R. Fehn, and N. Foster, 2003 

48 The Economic Impact of Venture Capital and Private Equity in South Africa, 2009 SAVCA/DBSA 2009 

49 Ibid


43 

equity investors; and (iv) the size of both the private 

sector and the qualified institutional investor community 

is sufficiently large to support the growth of the 

market generally. 50 

Experience suggests that it is important to get the 

details of the market micro-structure right in order for 

an SME exchange to function effectively and become a 

venue where SMEs can readily access the capital they 

require. The following mitigate against success and 

should be avoided: 

• Imposing expensive requirements such as maximum 

bid-ask spreads; 

• Applying trading regulations that are more relevant 

for larger companies and do not provide incentives 

for market participants to get involved with smaller 

companies; and 

• Failing to address relatively high issuance and trading 

costs caused by the introduction of systems and 

technologies developed for large-cap shares. 

It is important to develop less formal, more lightlyregulated 

capital markets that can cater largely to SMEs. 

In Kenya, where there is an informal and largely 

unregulated capital market that caters mainly to SMEs, 

a number of small companies have been able to raise 

capital from local investors such as private equity 

firms. While aware of its existence, the securities 

market regulator in Kenya does not regulate the activity 

in this market, but at the same time appears reluctant 

to see it disappear altogether or close down. 

A variety of other suggested policies have potential to 

increase listings and liquidity on SME exchanges, 

including: 

• The size of qualified SMEs should not be capped at 

very low levels, as this may have adverse effects 

on liquidity and discourage the participation of 

fund managers; 

• The public float should have a minimum size, as an 

excessively low float will also constrain liquidity. 

Some successful SME exchanges impose a minimum 

float of 10 percent, combined with commitments of 

market-making and research by the broker; 

• A large minimum number of shareholders may be 

necessary to improve liquidity; 

• Lock-up periods of 6-12 months or longer during 

which certain shareholders (with 5 percent or more 

of the shares) cannot sell their stake following an 

IPO can prevent the early exit of corporate insiders 

and curtail insider trading; and 

• Governments might consider tax incentives for SMEs 

that go public. 

In addition to less formal markets such as those 

described above, another approach that may be more 

suitable for meeting the needs of SMEs in smaller 

economies is to promote the establishment of regional 

SME funds, or in some cases to encourage eligible SMEs 

to consider using other nearby or regional stock markets 

as a venue where they may be able to raise the 

funding they need. Particularly for SMEs located in 

smaller economies, regional approaches like these may 

be the most, if not the only, suitable way to access 

equity capital. 

Priorities and challenges for LDCs 

In developing economies, where the financial sector is 

typically characterized by marked weaknesses that constrain 

the access to finance, private equity can be a valuable 

source of stable, longer-term financing for some 

firms. This is particularly true in economies where 

public equity and bond markets are not accessible other 

than to a handful of companies, and where bank credit 

is expensive and provided primarily on a short-term 

basis, when available at all. The “smart-money” features 

of private equity investments and the selection of investment 

targets are particularly valuable for economies 

where business and management expertise constitute 

scarce commodities. This financing tool has a direct 

impact on the active management of the firm via the 

value created post-investment, which in turn has potential 

spill-over effects to the rest of the economy. It 

enhances value by fostering innovation and access to 

markets, building capacity at the management level in 

50 Mako, 2010


areas such as marketing, management recruitment, strategic 

direction, increased contacts/network and financial 

advice. This can contribute to raise the general level 

of management standards and corporate governance in 

developing countries. 

For the majority of SMEs in emerging markets, funding 

from private equity funds is not generally available, 

however. SME equity funds in emerging markets 

face particular challenges, including a shortage of 

experienced fund managers with the right skill set and 

market knowledge, and low capital needs of small 

businesses, making the deal sizes unattractive to most 

private equity firms. As noted above, the performance 

of SME stock exchanges in developing countries has 

generally not been good. Public or development 

finance to catalyze or provide equity-type financing for 

innovative and high-potential SMEs can be needed in 

the interim to address these market failures. 

Government-backed funds can stimulate innovation 

and the adoption of innovations, compensating for a 

lack of available capital for innovation (for example, 

angel finance investors, venture capital funds). Many 

fund examples in the developing world are supported 

by donors or development finance investments, 

allowing them to serve difficult-to-reach clients. Key 

success factors of these equity fund cases include 

having a skilled and experienced fund manager, and 

achieving the targeted financial return through the 

fund’s investments. 

The Jordan Enterprise Development Corporation is 

financing an innovation fund with the Government 

of Jordan, the European Investment Bank, and Abraaj 

Capital. The Oasis 500 early stage and seed investment 

network offers small amounts of start-up capital 

linked to intensive mentoring and business incubator 

support, while the $500 million (target size) RED 

Growth Capital Fund set-up by Abraaj Capital is complemented 

by mentoring, networking, and informational 

support to high-potential and innovative 

growth SMEs. 51 

Further source of funding can be 

from Diaspora. 

C.2.6: ACCOUNTING AND AUDITING 

STANDARDS FOR SMEs 

Strong accounting and auditing standards improve SME 

access to finance by reducing informational opacities 

and encouraging lending based on financial statements, 

but countries have had to strike a balance between 

improving transparency and reducing the regulatory 

burden for SMEs. Reporting and audit requirements for 

SMEs, whether regulatory or simply required by banks 

as a consideration for accessing credit, can improve the 

The Korea Venture Capital Investment Corp (KVIC) 

KVIC is a government-backed fund of funds established in 2005 to provide stable capital to SMEs in innovative technology 

sectors. KVIC currently has USD 1.5 billion in assets under management in over 150 venture capital and buyout 

firms, and commits USD 200-300 million every year to venture capital funds. The KVIC also supports partnerships 

funds to invite foreign investors into the funds, promoting global networks and ensuring transparent fund management 

systems. The establishment of KVIC led to creation and strengthening of Korean legislation to provide stable 

capital to the venture capital industry, and also influenced the amending of regulation to attract more private investors 

into venture capital funds. Such funds have the potential for significant positive financial and developmental 

impact, including increased employment, skills development, corporate governance best practices, and innovation. 

KVIC targets specialized SMEs in the relatively riskier segments of high-growth technology and innovation, reflecting 

their more mature SME equity markets and lower information asymmetries relative to developing countries where 

equity funds have recently begun to develop, and thus cater to the overall SME segment. 

51 Pearce, 2011


45 

quality of SME information, but can also act as a barrier 

to SME finance and growth. External audits can be costly 

and difficult to justify, as SME accounting is usually 

straightforward, relying on historical cost-based, rather 

than fair value, measurement. They may also act as an 

incentive to stay disengaged from the formal sector and 

full regulatory compliance. 52 

International Financial Reporting Standards (IFRS) 

have been adapted and streamlined for SMEs, and 

about 60 countries have adopted the SME version of 

IFRS. However some countries have concluded that the 

SME version of IFRS is still too costly and burdensome 

for local and smaller SMEs, and have adopted a simpler 

set of obligatory standards. There are similar concerns 

regarding obligatory auditing. Although auditing 

improves the reliability of financial statements, the EU 

exempts firms with fewer than 50 employees from 

obligatory audits, a rule that also attempts to strike a 

balance between the objectives of improving transparency 

and reducing the regulatory burden for small 

firms. Some studies have found that effective accounting 

standards are positively associated with measures 

of access, but research in this area has been limited by 

the lack of good quantitative indicators of the quality 

of financial reporting, and are not focused on SMEs. 

There has been substantial debate around developing 

accounting and auditing standards for SMEs that strike 

the right balance between transparency and regulatory 

simplicity. SMEs are typically non-public entities with 

simple financial transactions. Many of the disclosures 

aimed at public shareholders and lenders may be 

unnecessary for SMEs. Several countries resist adopting 

IFRS for SMEs, claiming that these standards remain 

excessively complex and costly for smaller firms. 

World Bank research shows that many countries use 

company size to determine a company’s financial 

reporting and audit requirements, although the relief 

that is given tends to be quite limited. Most commonly, 

SMEs are exempted from statutory audit 

Global Technology and Innovation 

Partners (GTIP) 

Diaspora can play a prominent role in introducing and 

financing innovation, as has been widely acknowledged 

in the case of India and Israel. An emerging example is 

the Arab Diaspora links to support SME Innovation in the 

MENA region. Global Technology and Innovation 

Partners (GTIP) is a partnership of successful Arab diaspora 

entrepreneurs based in Silicon Valley, targeting 

investments across the Middle East, North Africa and 

South Asia regions (MENASA). GTIP has recently established 

the “Rising Tide Venture Capital Fund” ($250 million 

being raised) that will focus on building local 

entrepreneurial ecosystems and provide seed, early, and 

growth-stage capital for innovative ventures in MENASA 

countries. To help ensure the development and acceleration 

of successful and innovative start-ups in the region, 

GTIP intends to pool their staff, partners, and other successful 

entrepreneurs from Silicon Valley, and elsewhere 

in the United States to provide companies in MENA with 

continuous mentorship and expertise. 

GTIP has two key partners to help transfer support and 

provide mentorship: Plug and Play Technology Center 

(PnP), which is a technology incubator based in Silicon 

Valley, and the TechWadi networking association, which 

allows GTIP to tap into the Arab diaspora to provide 

mentorship and advice to MENA entrepreneurs. 

requirements and/or are subjected to simplified 

accounting standards. However, the thresholds used 

to define SMEs are often quite low and exempt only 

the smallest of companies. There is significant resistance, 

often motivated by genuine concerns, within 

parts of the accounting and audit profession to the 

notion that SMEs should be afforded greater relief in 

their financial reporting and audit obligations. The 

benefits of differentiated standards or systems need 

to be better understood. 

Standards, Guidelines and Good Practice 

A clear case can be made in favor of simplified accounting 

and financial reporting framework for smaller 

52 Ibid


IFRS for SMEs 

The IFRS for SMEs is a self-contained standard of 230 pages, designed to meet the needs and capabilities of SMEs. 

Compared with full IFRSs (and many national Generally Accepted Accounting Principles), the IFRS for SMEs is less 

complex in a number of ways: 

• Topics not relevant for SMEs are omitted. Examples: earnings per share, interim financial reporting, and segment 

reporting. 

• Where full IFRSs allow accounting policy choices, the IFRS for SMEs allows only the easier option. Examples: no 

option to revalue property, equipment, or intangibles; a cost-depreciation model for investment property unless fair 

value is readily available without undue cost or effort; no “corridor approach” for actuarial gains and losses. 

• Many principles for recognizing and measuring assets, liabilities, income, and expenses in full IFRSs are simplified. For 

example, amortize goodwill; expense all borrowing and R&D costs; cost model for associates and jointly-controlled 

entities; no available-for-sale or held-to-maturity classes of financial assets. 

• Significantly fewer disclosures are required (roughly 300 versus 3,000). 

• The standard has been written in clear, easily translatable language. 

• To further reduce the burden for SMEs, revisions to the IFRS will be limited to once every three years. 

Source: http://www.ifrs.org/IFRS+for+SMEs/IFRS+for+SMEs.htm 

enterprises, with requirements commensurate with 

their size, the types of transactions they conduct, and 

their limited range of stakeholders. A “one-size-fitsall” 

approach to financial reporting and auditing 

requirements ignores the capacity constraints that 

SMEs face and unnecessarily increases the cost of doing 

business for those enterprises, which generally drive 

economic growth. In addition, by increasing the 

requirements for SMEs, governments may create disincentives 

for businesses to operate in the formal sector. 

A holistic approach would take into account SMEs’ 

need for relief from excessive accounting and auditing 

requirements, as well as their need for more time to 

implement appropriate standards effectively. 

Recognizing this, the International Accounting 

Standards Board (IASB) issued in 2009 a simplified 

version of its full IFRS, as many SMEs argued that full 

the IFRS imposed a burden on them, a burden that had 

been growing as IFRS became more detailed and more 

countries had begun to use it. 

Prior to the issuance of IFRS for SMEs, the United 

Nations Conference for Trade and Development’s 

Intergovernmental Working Group of Experts on 

International Standards of Accounting and Reporting 

(UNCTAD-ISAR) had already developed a three-tiered 

system for financial reporting, as follows: 

Level 1. This level would apply to listed enterprises 

whose securities are publicly traded and those in 

which there is significant public interest. These 

enterprises should be required to apply the IFRS 

issued by the IASB. 

Level 2. This level would apply to significant business 

enterprises that do not issue public securities 

and in which there is no significant public interest. 

This set of standards is likely to be superseded by 

IFRS for SMEs. 

Level 3. This level would apply to smaller enterprises 

that are often owner-managed and have no


47 

table 2 Financial reporting and audit relief given to SMEs 

Country Preparing F/S Accounting standards Statutory audit Publication 

Albania 

3 3 

Brazil 

3 3 3 

China 

3 3 

Croatia 

3 3 

n/a 

Egypt 

3 

n/a 

El Salvador 

3 

n/a 

Indonesia 

3 

Morocco 

3 3 

n/a 

Pakistan 

3 

n/a 

Panama 

3 3 

n/a 

Sri Lanka 

3 

n/a 

Thailand 

3 

Tunisia 

3 

n/a 

Vietnam 

3 3 

3 Lesser requirements for SMEs (size criteria) 

n/a Not required of any non-listed company, regardless of size or legal form. 

Source: Financial Reporting and Audit Requirements of Small and Medium-Sized Enterprises 

or few employees. The approach proposed is 

simplified accruals-based accounting, closely 

linked to cash transactions. National regulators 

may permit a derogation for newly formed businesses 

or new entrants to the formal economy to 

use cash accounting for a limited time. IFRS for 

SMEs is likely to be overly complex for these 

enterprises. 

This three-tiered approach is broadly in line with the 

recommendations made by the World Bank though the 

Reports on the Observance of Standards and Code- 

Accounting and Auditing (ROSC A&A) assessments. It 

has already been put in place in several countries, 

including the signatories of the OHADA (Organisation 

pour l’Harmonisation en Afrique du Droit des Affaires) 

Treaty in Francophone Africa. 53 


As outlined, many LDC accounting professions may 

currently be too weak to effectively support even IFRS 

53 See ROSC A&A for Senegal (available in French), at: http://www.worldbank.org/ifa/rosc_aa_sen_fre.pdf


for SMEs. Capacity building and development is 

needed, including for oversight institutions. 

While the IFRS for SMEs are less burdensome than the 

full IFRS, they may still be excessive for smaller and 

capacity-constrained enterprises. Exemptions from 

IFRS and other requirements for smaller firms may be 

merited, or the development and implementation of 

simplified versions. 

C.3 Public Sector Interventions 

Many governments seek to encourage SME finance 

through direct and indirect interventions, in order to 

address deficiencies in the enabling environment and 

residual market failures. Well-designed policy interventions 

can be useful as transitional measures in periods 

where the government is trying to strengthen 

financial infrastructure and the legal and regulatory 

framework. They may also be valid in cases where 

some groups remain difficult to reach, even when efficient 

financial infrastructure and regulations are in 

place. Interventions can also be important in periods 

of instability and crisis, where there is an actual or 

potential collapse of financial intermediation by private 

agents. 

The worldwide financial crisis dented confidence in 

the belief that reliance could be placed solely on market 

solutions for access to financial services, and has 

triggered a range of public initiatives designed to 

protect or re-launch the flow of credit to various purposes 

and sectors. 54 Government policy interventions 

have included partial credit guarantee schemes, direct 

lending facilities (sometimes entailing credit 

subsidies), and lending by state-owned financial institutions. 

These interventions provide different combinations 

of liquidity and risk mitigation strategies and 

can be priced at or below market rates. The choice of 

instrument/intervention typically depends on the 

binding constraint in the respective environment. The 

government support initiatives with the greatest representation 

in the G-20 stocktaking exercise include: 

funded financing facilities extended via state banks 

and/or private financial institutions; credit guarantees 

extended via state banks and/or private financial institutions; 

and, state bank initiatives. 

Government support mechanisms can expand significantly 

the SME finance space, although it is always 

important in these cases to minimize their potential 

market distorting consequences, and to not lose sight 

of the fact that financial services for SMEs are best 

served by strong banking and non-banking institutions 

that can develop business models to achieve the 

optimal balance between risk, reward, and cost. The 

more supportive the overall enabling environment is 

in a given country, the larger the size of the bankable 

SME space, which provides incentives for financial 

players to engage in this space and increases odds of 

success and demonstration effects. 

The following table estimates the amount of financing 

per SME in examples of public sector interventions that 

are profiled in this section. While this is a rather superficial 

and incomplete assessment, and the ratios are 

influenced by the age of the interventions (the Turkey 

and Korea models are more recent, for example, and 

may still be growing), this is still useful in providing 

insights regarding the cost-effectiveness of each example. 

The three partial credit guarantee facilities come 

out relatively well on this measure. 

As is clear from the 2010 GPFI stocktaking exercise, government-supported 

interventions in the SME finance 

space are commonplace. The “perfect” enabling environment 

for finance being a long term/tentative objective, 

government support is always likely to be needed 

to provide incentives, catalyze a market, or create a 

demonstration effect, if not for purely political reasons. 

In all cases, government intervention (state banks, 

lending facilities, credit guarantees, risk-sharing, 

54 Center for Global Development. 2009. “Policy Principles for Expanding Financial Access.” Report of the CGD Task Force on Access to 

Financial Services. Washington DC.


49 

table 3. Financing per SME: Comparison Table 

Country 

Name of 

Program 

Starting 

year 

Financing Amount 

(USD m) 

Number of SMEs 

outreached 

Financing per 

SME (USD) 

Afghanistan 

DEG - SME 

Credit-Guarantee-Facility 

2005 37 1,256 29,459 

Brazil Programa INOVAR I-II 2001 1,000 3,250 307,692 

Canada 

Canada 

Chile 

EU 

Korea 

Turkey 

WB&G 

Business Development 

Bank of Canada 

Canada Small Business 

Financing Program 

FOGAPE (SME lending 

guarantee fund) 

EU/EBRD SME Finance 

Facility 

The Korea Venture Capital 

Investment Corp 

European Investment Bank 

SME APEX Facility 

European-Palestinian Credit 

Guarantee Fund 

1944 15,008 28,000 536,000 

1999 8,000 113,850 70,268 

1980 9,636 362,753 26,564 

1999 3,168 101,000 31,366 

2005 1,100 930 1,182,796 

2005 216 343 629,738 

2005 43.2 1,200 36,000 

Source: Scaling-up SME access to financial services in the developing world, 2010 

capacity-building, etc.) should be carefully designed 

and better evaluated with a view to accurately measure 

their achievements in terms of outreach, additionality, 

and leverage. Subsidies should be only reserved to 

address actual market failures, and carefully designed to 

avoid any disincentive for private sector providers of 

financial services to serve the SME segment. 

Public procurement also represents a huge opportunity 

for SMEs, and can be used to improve SME access to 

financial services, including supply chain finance. The 

value of public contracts awarded to SMEs in a number 

of European countries during the recent global 

financial sector crisis was much larger than the value 

of guarantees provided to SMEs. 

C.3.1: STATE BANKS 

State-owned banks have played an important role in 

SME finance in many developed and emerging countries 

as shown by two World Bank surveys, one conducted 

globally and the other focused on the MENA 

region. 55 Both surveys show that the share of SME loans 

in total loans is not significantly related to bank ownership, 

even after controlling for other factors. The 

survey conducted for the MENA region shows that 

55 Beck, Demirgüç-Kunt, and Martinez Peria. 2008. “Bank Financing for SMEs around the World: Drivers, Obstacles, Business Models, and 

Lending Practices.” World Bank Policy Research Working Paper 4785. The World Bank, Washington DC. Rocha. Farazi. Khouri, and 

Pearce. 2011. “Bank Financing for SMEs in the MENA Region: Evidence from a Joint Survey of the World Bank and the Union of Arab 

Banks.” Policy Research Working Paper 5607.March. The World Bank. Washington, DC.


state-owned banks take more risks in SME lending relative 

to their private counterparts – they are less selective 

in their strategies to target SMEs, have a lower ratio 

of collateralized loans to SMEs, and have a higher share 

of investment lending in total SME lending. The same 

MENA survey shows that state banks have less developed 

SME lending technologies and risk management 

systems relative to private banks – a lower share of 

state banks has dedicated SME units, makes use of 

credit scoring, and conducts stress tests. In other 

words, state-owned banks seem to make a positive 

contribution to SME finance and are willing to take 

more risks to perform their mandates, but do not seem 

to have the capacity to manage these risks effectively. 56 

These results are consistent with other empirical 

research showing that the financial performance of 

state banks is generally weak by comparison with that 

of private banks. State-owned banks can have lower 

levels of profitability due to lower margins, larger 

overhead costs due to excessive personnel, and higher 

levels of non-performing loans. This is to the result of 

a combination of factors, including development mandates 

that frequently entail larger exposure to risk, systematic 

political interference leading to poor lending 

and employment decisions, and internal operational 

deficiencies. All in all, the empirical literature suggests 

that the record of state banks as policy intervention 

tools is mixed, and their contribution to access to 

finance frequently comes with a cost. 57 

At the same time, some countries seem to have been 

able to introduce reasonable mandates and governance 

structures to state banks. Indeed, there is some research 

that indicates that once public banks are provided with 

clear mandates, strong governance structures, and the 

right incentives, they can play a positive role in 

mobilizing savings, expanding access, and reducing 

credit pro-cyclicality. State banks have played an 

important countercyclical role in the recent financial 

crisis in many countries. 

Good Practices and Examples 

State-owned banks may play a useful complementary role 

in the provision of credit to SMEs. However, the successful 

cases usually involve legislation specifying clear mandates, 

sound governance structures with independent 

boards, clear performance criteria, the obligation to price 

loans according to risk, the obligation to generate a positive 

return, and the ability to recruit and retain qualified 

staff. In some cases, specific legislation or board directives 

stress that the bank will not compete directly with the 

private sector but will fill remaining gaps and target the 

segments that remain underserved. 58 

Clear mandates and strong corporate governance standards 

are essential for deflecting political interference. 

The failure of many state banks is explained primarily 

by political interference, unclear responsibilities from 

the different stakeholders, and lack of independence of 

the board of directors. The government should appoint 

a shareholder representative, which can be a minister 

or a high-level commission with two or three ministers. 

The shareholder representative should appoint the 

members of the board and communicate the expectations 

and priorities of the government that should be 

addressed by the bank. The members of the board of 

directors should be appointed for a fixed period of 

time, with some overlap among members. The members 

of the board should be elected according to the 

needs of the bank, which requires expertise on SME 

lending. The board of directors should have the power 

to appoint and remove the CEO. 

56 Rocha, Farazi, Khouri, and Pearce. 2011. “Bank Financing for SMEs in the MENA Region: Evidence from a Joint Survey of the World Bank 

and the Union of Arab Banks.” Policy Research Working Paper 5607. March. The World Bank. Washington, DC. 

57 See e.g. Micco, Panizza, and Yañez, 2004. “Bank Ownership and Performance” Inter- American Development Bank, Research 

Department Working Paper 518 OECD (2009); Farazi, Feyen, and Rocha. 2011. “Bank Ownership and Performance in the Middle East and 

North Africa Region.” Policy Research Working Paper Series 5620. The World Bank, Washington DC; Micco, Panizza, and Yañez. 2007. 

“Bank Ownership and Performance: Does Politics Matter?” Journal of Banking and Finance. 31 (1): 219–41, and Levy-Yeiati, Micco, and 

Panizza, 2007. “A Reappraisal of State-Owned Banks” Economica 7(2), 209-247, as well as the references provided therein. 

58 Rudolph, Heinz P. 2009. “State Financial Institutions: Mandates, Governance, and Beyond.” Policy Research Working Paper 5141. The 

World Bank. Washington DC.


51 

Box: Examples of State Banks Performing Their SME Finance Mandates 

Example 1: The Development Bank of Canada 

The Development Bank of Canada (BDC) provides support to businesses in all stages of development, with focus on 

riskier segments than those targeted by commercial banks, including SMEs. Since 1944, the starting year, BDC has 

provided financing of CD 15 billion dollars, reaching about 28,000 SMEs. Because its pricing policy reflects the risk 

of the borrower, loans from BDC are generally more expensive than loans from commercial banks. BDC has pioneered 

innovative solutions for entrepreneurs. It was the first institution to offer flexible long-term loans to businesses 

and one of the first banks to offer an integrated approach to small business development through financing 

and advice. While its non-performing loans are higher than those of its peers due to higher-risk clients, revenues are 

sufficient to ensure a positive return on equity – BDC is legally required to generate a return at least equal to the 

long-term government cost of funding. BDC played an important countercyclical role during the financial crisis: its 

lending increased by about 50 percent in 2010 through replacement of departing lenders in syndicated arrangements; 

it participated in new deals on a 50/50 basis; it purchased of commercial mortgages; and it created a line of 

credit guarantee. In addition, BDC supported a government program for purchasing asset-backed securities. 

Although BDC increased its risk tolerance during the crisis, it was able to continue generating positive returns due to 

its sophisticated risk management system. 

Example 2: Chile’s Banco Estado 

Banco Estado targets SMEs and segments of the population not generally served by commercial banks. The Chilean 

government supported Banco Estado in its early years, but later transformed it into an autonomous bank. Banco 

Estado has since competed in an open financial market and reinvests its profits for growth. Pricing policy is based on 

market references and the bank is forbidden by law to subsidize credit operations or lend to state institutions. Banco 

Estado is required to have a return on equity aligned with the average of the banking industry. In association with 

private partners, Banco Estado has been efficient in using its wide branch network to provide access to SMEs and 

low-income households. During the financial crisis, Banco Estado played an important countercyclical role by providing 

credit to companies and individuals that had lost access to credit. This role is reflected in an increase in its market 

share from 13 to 16 percent of total assets between December 2008 and November 2009. The sound financial position 

of bank at the beginning of the crisis and the timely capitalization of the bank (USD 500 million) were essential 

for enhancing its lending capacity and filling a countercyclical role. 

Example 3: Morocco’s Crédit Populaire 

The Crédit Populaire du Maroc (CPM) has succeeded in serving SMEs thanks to its proximity to clients and a unique 

governance structure adapted from the French Banques Populaires. It is one of the largest Moroccan banks, accounting 

for one fourth of the nation’s banking assets. SME finance has been a significant source of profits due to a reasonable 

credit quality, effective pricing, and an inexpensive funding base. A specific law lays out the foundations for 

effective governance by clearly defining the CPM’s mandate and establishing checks and balances between the head 

office and its cooperative members. The CPM group includes a listed joint stock bank (Banque Centrale Populaire 

(BCP)) and 10 regional cooperative banks (Banques Populaires Régionales (BPR)), responsible for most retail activities, 

including SME finance. The State is the main shareholder of the group, but a reform implemented in 2000 

enhanced the role and influence of the regional cooperative banks. These are medium-sized regional institutions 

owned by their customers and with strong ties to their regions, defining BPR’s strategies and products. Economies 

of scale are achieved by developing systems at the group level (e.g. for Basel II implementation) while ensuring they 

are tailored to local needs.


State banks will only be able to perform their SME 

finance mandate effectively if they have in place proper 

lending and risk management technologies. This 

requires the presence of adequate human capital and 

operational systems that allow them to measure and 

price risks fairly. In order to ensure efficiency, state 

banks should be free to set their compensation policies 

and compete with other banks for qualified staff, and 

not be submitted to public sector employment practices 

and wage scales. The box on page 51 provides 

examples of three state banks that have performed reasonably 

well with their SME lending mandates. 

Challenges and Priorities for LDCs 

The enabling environment for finance in LDCs tends 

to be quite weak, due to deficient institutional and 

legal frameworks, poor financial infrastructure, and 

limited supervisory capacity. These conditions tend 

to imply more frequent and severe market failures 

that would justify more policy interventions, but the 

same conditions also imply a more limited capacity to 

implement these interventions effectively. 

There are no easy solutions to this policy conundrum. 

Arguably, credit guarantee schemes may be a more 

effective mechanism than state bank lending to expand 

access to SMEs in LDCs, as the schemes are probably 

offered in middle-income countries. In the LDCs 

where state banks already exist and perform an access 

role, or where they are being created, policy-makers 

must follow the same best practices that have been 

identified for this type of intervention, and possibly 

take additional precautionary measures to avoid excessive 

political interference in these banks. The next section 

identifies good practices and examples for state 

bank interventions, while the last section identifies 

some additional measures and options for LDCs. 

As in the case of middle-income countries, if there is a 

rationale for a market intervention to expand SME 

finance in LDCs, it is possible that this could be better 

achieved by a well-designed credit guarantee scheme 

than by a new state bank (see next section). In the 

cases where state-owned banks already exist and play a 

role in SME finance, the first priority should be to 

ensure clear mandates and governance structures. It is 

preferable to have a specialized SME state bank funded 

by the budget and/or donors than a deposit-taking 

bank. Although there is no evidence that specialized 

state banks perform better than deposit-taking state 

banks, this construction would limit the potential 

damage that could be caused by excessive political 

interference and/or the limited regulatory and supervisory 

capacity in LDCs. 

In the LDCs where there is a state bank operating side by 

side with a credit guarantee scheme, the role and target 

markets of the two institutions should be well defined. 

C.3.2: APEXES AND OTHER WHOLESALE 

FUNDING FACILITIES 

Second-tier institutions or funding facilities that channel 

funding (grants, loans, guarantees) to multiple providers 

in a single country or region are widely used to 

support the development of microfinance and SME 

finance. These “apex” facilities are attractive because 

they permit donors to pass the difficult and time-consuming 

task of SME selection to a local institution that is 

assumed to have the requisite skills. However, they have 

a mixed track record in terms of effectiveness, results, 

and fund utilization. Their main funding instrument is 

local currency debt. They are mostly funded by governments, 

international donors, or a mix of both. 59 


Direct lending in the form of soft loans/line of credit/ 

co-financing/equity funds will likely continue to be a 

popular intervention in the SME finance space due to its 

simple structure and faster implementation. However, 

the impact of many of these programs has been limited 

due to the subsidy and political components associated 

59 Sources: CGAP Brief: “Apexes: An Important Source of Local Funding”, March 2010, and 2011 ongoing CGAP Apex research.


53 

with them. More research needs to be conducted on the 

impact of the variety of directed lending programs that 

have been implemented globally. Furthermore, guidelines 

for designing such programs should be developed 

in order to maximize their impact while minimizing 

the subsidy component, political interference, and 

crowding-out effects on the private sector. To further 

minimize their market distorting effect, an optimal exit 

strategy for such programs is also necessary. 

In the case of apex funds for micro and SME finance, 

research has suggested several preconditions for successful 

application of the apex model. These include: 

• Funding the development of sustainable finance 

providers (such as banks), including building 

capacity and technical expertise of the apex staff 

and of its clients; 

• Ensuring the apex institution has a strong independent 

governance structure able to guarantee delivery 

of its mandated functions; 

Apex “Lessons Learned” 60 

• Apexes have been effective where they have set high performance standards for their financing to financial institutions 

(FIs), thus focusing investment on only the highest potential FIs that have the capacity to build large-scale, financially 

viable operations. 

• Apexes have contributed to the sustainable growth of institutions that provide access to finance for poor households 

and SMEs. In some cases, apexes have contributed to overheated markets by putting too much emphasis on 

disbursements and outreach rather than quality. 

• Some apexes have gone beyond their role as a wholesaler in contributing to the growth of microfinance industries, for 

example by building the institutional capacity of the institutions to which they lend or by playing an important role 

in the elaboration of new regulations. 

• Apexes have often funded too many institutions that had limited chances of becoming sustainable. It is important for 

apexes to select the right institutions and to have the appropriate tools to measure the performance of their clients. 

Technical assistance and training should be provided to FIs in order to increase the absorption capacity, growth 

potential, and sustainability of the microfinance sector. However, grants for technical assistance represent a very 

small percentage of overall apex funding and apexes do not always have the internal capacity to take on that function. 

• Financing should fit each FI and bank’s cash-flow needs, institutional capacity, and past performance. 

• High quality apex management and well-trained staff are key to success. 

• Apex boards must be sufficiently independent from political influence, and include members from the private sector 

or civil society. 

• When managed well, apexes can crowd commercial investment for FIs by demonstrating their repayment capacity 

at commercial interest rates. 

• Funding from apexes can prove useful in times of international liquidity squeezes, as was the case during the global 

financial crisis. 

• As markets mature, apexes need to look for ways to add value and a positive market development role. Apex 

institutions can be considered as local development finance institutions with a role of filling market gaps and spurring 

on market development for the benefit of the un-banked poor and SMEs. 

60 Sources: Duflos, Eric & El Zoghbi, Mayada “Apexes: An Important Source of Local Funding”, March 2010, (http://www.cgap.org/p/ 

site/c/template.rc/1.9.43025/ ) and Forthcoming: Forster, Sarah and Duflos, Eric “Reassessing the Role of Apexes: Findings and 

Lessons Learned”, CGAP 2011; Pearce, Douglas, 2002, “Lessons Learned from the World Bank -supported Apex Facility in Bosnia”; 

2009, “Focus on Apexes”; Levy, Fred, 2001, “Apex Institutions in Microfinance”; CGAP Occasional Paper, No. 6. Also: Vega, Claudio 

Gonzalez, 1998, “Microfinance Apex Mechanisms: Review of the evidence and policy recommendations.”


• Applying a funding policy based on clear selection criteria, 

such as portfolio quality, depth of outreach, management 

quality, and progress toward eventual 

sustainability (along with the authority to discontinue 

funding to institutions that fail to meet these criteria); 

• Offering commercial interest rates; 

• Ensuring that the apex does not create over-heating 

through unsustainable growth in SME lending, that 

could lead to SME borrower over-indebtedness; 

• Providing the capacity to evolve and adapt its mission 

and products according to market maturity; 

• Including flexible and market reactive disbursement 

plans, and; 

• Providing high quality operational management and 

staff skills. 


Apexes can be a powerful tool to advance financial 

access to SMEs and poor households, in particular 

when the regulatory environment for the sector is 

still weak, and they are increasingly favored by 

Successful examples of apex facilities 

South Asia Regional Apex (SARA) Fund (India) 

South Asian Regional Apex Fund (SARA), launched in 1995, is a $25 million fund primarily focused on growth investments 

in SMEs engaged in technology, manufacturing, media, and retailing. Contributors to the SARA Fund include 

multi-lateral institutions like IFC in Washington, Japan Bank for International Corporation, Asian Development Bank, 

and Indian institutions like ICICI, Industrial Development Bank of India, Small Industries Development Bank of India, 

and Punjab & Sindh Bank. 

While the Fund was originally conceived with a development orientation, and had a specific allocation for smaller 

developments in early stage companies, the portfolio was optimized, and since mid-1998, SARA has invested across 

technology, media, distribution, biotechnology, and telecommunications. SARA is currently invested across 26 companies 

to which it is fully committed. The Fund has exited from 19 of its investments, generating a gross return of 15 

percent for its contributors. 

Funding Facility – European Union (EU) and European Bank for Reconstruction and Development (EBRD) SME 

Finance Facility 

The EU and EBRD SME Finance Facility is a regional facility, created in 1999, consisting of EBRD-funded loans to participating 

financial intermediaries (banks or leasing companies) in order to on-lend to eligible SMEs for investment and 

working capital needs. EBRD supports the loans with comprehensive technical assistance programs, and grants funded 

by the EU are aimed at developing the capacity of FIs to engage in SME finance on a sustainable basis. As a result, 

EBRD funds have financed over 100,000 loans, with an average individual loan size of USD 30,000. Technical assistance 

funds have been used to train more than 7,300 FI staff across all areas of their business (sales, credit analysis, 

management, back-office support, etc.). The FIs graduate from the EU grant support under the Facility after 5 years, 

and the majority of these institutions continue to provide finance to the SME segment as a key strategic market. 

Funding Facility – European Investment Bank SME APEX Facility (Turkey) 

The facility was designed to provide medium- to long-term finance for fixed asset investments of SMEs. The loan was 

secured from the European Investment Bank and TSKB, a privately owned Turkish development bank, which designed 

the structure and was the borrower of the loan. Turkey’s treasury guaranteed TSKB’s obligations and TSKB acted as 

wholesale (APEX) bank, providing credit lines to approved banks and leasing companies (AFIs) for on-lending to 

SMEs. AFIs manage project risk assessments and submit loan/leasing applications to TSKB. Minimum leasing/loan 

maturities are 4–6 years (including a 1-year grace period) and loans up to 50 percent of investment cost. The program 

financed USD 216 million to almost 350 SMEs.


55 

governments and public funders. In several countries 

(e.g., India, Bangladesh, Colombia, Mali, Afghanistan) 

they have contributed to increasing financial access. 

But poorly designed apexes can waste time money 

and fail to meet their own goals. While each country 

has a different context that affects the success of an 

apex, the lessons outlined above can help governments 

and funders avoid major pitfalls. 

C.3.3 PARTIAL CREDIT GUARANTEE 

SCHEMES 

Many countries operate partial credit guarantee 

schemes (PCGs). In developed countries, such schemes 

have been operational for several decades, while their 

use in developing countries is more recent. Credit 

guarantee schemes can be organized in different ways 

but their core objective is the same: to guarantee the 

loans offered by a financial institution to a borrower 

subject to both the payment of a premium and a range 

of other rules and conditions. When default occurs, 

the lender is compensated by the guarantor as per the 

initial agreement. In some arrangements, the guarantor 

can benefit from a counter-guarantee from a higher 

level guarantee institution that is also subject to the 

payment of a premium. 

Credit guarantee schemes are one of the most marketfriendly 

types of interventions, as private financial 

institutions usually retain a primary role in the screening 

of borrowers and final lending decision. Unlike 

other types of interventions, such as state banks or 

directed lending arrangements, they may generate 

fewer distortions in the credit market and may lead to 

better credit allocation outcomes 61 ). Guarantee schemes 

may prove an effective vehicle for reaching underserved 

groups such as start-ups and small firms. They 

may also generate positive externalities by encouraging 

banks to get into the SME market and improving their 

lending and risk management systems. Guarantee 

schemes have also been used for countercyclical 

purposes and the recent financial crisis highlighted the 

importance of this countercyclical role. 

Credit guarantee schemes can be organized in different 

ways, such as mutual guarantee institutions, credit 

guarantee banks, or credit guarantee funds owned and 

operated entirely by the public sector or by a combination 

of public and private shareholders. Some countries 

maintain different types of credit guarantee schemes. 

Mutual guarantee institutions are typically private institutions 

with a mutual legal structure created by the beneficiary 

SMEs. Their capital is provided directly by the SMEs 

that apply for a loan guarantee in the form of cooperative 

or mutual shares. Each member has equal voting rights in 

electing the general assembly and board of directors. 

Mutual guarantee institutions are usually run by entrepreneurs, 

bringing an SME perspective to risk assessment 

and management. They are very common in Europe but 

also exist in some emerging countries. 

Guarantee banks are legally structured as private foundations 

or joint stock companies, and can be owned by 

a variety of private shareholders such as chambers of 

commerce and industry, commercial or savings banks, 

banking associations, and insurance companies. They 

can be regulated and supervised as other financial 

institutions. Guarantee banks are an important component 

of the German credit guarantee system. 

Partial credit guarantee schemes created, funded, and 

managed by the public sector (the government and/ 

or the central bank) are one of the most common 

types of guarantee schemes. They are usually legally 

independent entities and can be managed independently 

or by another public institution such as a state 

development bank or state development fund. In 

many cases, the ownership structure is mixed, combining 

the state, commercial banks, and other private 

shareholders. In a few cases, participating banks are 

the dominant shareholders. 

61 Beck and De la Torre, 2006


Good Practices and Examples 

To jumpstart and nurture SME lending in LDCs, policymakers 

may consider the creation of a credit guarantee 

fund in partnership with the private sector and international 

donors. The guarantee fund should be a 

legally independent entity governed by a board of 

directors that comprises representatives from the government, 

the private sector (mostly banks), and donor 

agencies. It is important to engage participating banks 

early on to increase the fund’s capital and ensure an 

effective use of the guarantees. It is also essential to 

engage international partners to ensure the required 

financial and technical assistance in the start-up phase. 

The credit guarantee fund should be supervised by the 

central bank. 

The credit guarantee fund should operate with simple 

and transparent rules and procedures. The final decision 

on the applications should not exceed two weeks. 

Eligibility criteria should be transparent, possibly 

based on turnover or number of employees. The board 

will have to decide, however, whether it is ready to 

accept applications from early start-ups with no performance 

history. This is a non-trivial decision that has 

to be made locally. The board will also have to decide 

whether the decision on the approval and rejection of 

the guarantee will be disclosed to the borrower. The 

Afghani and Palestinian guarantee schemes discussed 

in the box on page 57 do not disclose this decision to 

the borrowers in an attempt to avoid moral hazard, but 

there are advantages in maintaining an open and transparent 

application and decision-making policy. 

Partial credit guarantee schemes structured as separate 

funds and owned by the public or private sectors are 

one of the most common forms of guarantee schemes 

worldwide. There is no research comparing the performance 

of state versus private-controlled guarantee 

schemes, but the presence of private banks in the ownership 

structure not only brings more capital to the 

scheme but may also generate other advantages such as 

a business orientation and effective peer monitoring. 

The Lebanese Kafalat scheme is the largest SME credit 

guarantee scheme in the Middle East and North Africa 

region and provides a relevant example of a privatelyowned 

scheme that has generated reasonable outcomes. 

It has a good outreach, has generated positive 

returns on equity for the past several years, and has 

retained and reinvested all of its profits in newly issued 

guarantees. 62 

Legal and ownership structures are important aspects 

of a guarantee scheme, but the effectiveness of any 

scheme will also depend fundamentally on its rules 

and procedures, such as eligibility criteria, fees, coverage 

ratios, and payment rules. Guarantee schemes may 

add limited value and prove costly when they are not 

designed and implemented carefully. Loose criteria, 

low fees, and overly generous coverage ratios and payment 

rules may result in the provision of guarantees to 

enterprises that would have obtained credit anyway. 

They may also result in financial imbalances requiring 

large and recurrent government contributions. 

The optimal design of a credit guarantee scheme 

depends to a good extent on country-specific conditions, 

including the quality of the legal framework and 

financial infrastructure, as well as the sophistication of 

lending institutions. However, reviews of credit guarantee 

schemes worldwide have identified a number of 

general principles that should be considered by all 

schemes in order to ensure positive outcomes, including 

outreach (number of credit-constrained SMEs that 

benefit from the scheme), additionality (capacity to 

target guarantees to credit-constrained SMEs), and 

financial sustainability (capacity to avoid excessive net 

losses and recurrent recapitalizations by the state). 

The box below summarizes the key features of welldesigned 

guarantee schemes, while the box on page 57 

provides specific examples of well-designed schemes 

in high-, middle-, and low-income countries (Chile, 

West Bank and Gaza, and Afghanistan). 

62 Saadani, Youssef, Zsofia Arvai, and Roberto Rocha (2010) provide a review of PCGs in the Middle East and North Africa region.


57 

Box: Examples of Credit Guarantee Schemes 

Example of an Upper-Middle-Income Country: FOGAPE (Chile) 

FOGAPE is a partial credit guarantee scheme operated by Banco Estado, a large state-owned bank in Chile (see 

previous section). It provides partial guarantees on SME loans extended by commercial banks and counter-guarantees 

to mutual guarantee associations. FOGAPE targets SMEs who lack collateral or need longer maturities. FOGAPE 

functions in many aspects as a traditional guarantee scheme by sharing the risk of default on eligible loans and 

charging a guarantee premium. However, FOGAPE is also unique by having pioneered a new approach for allocating 

guarantees among participating banks. Every year FOGAPE conducts four to six auctions where each bank submits 

a bid indicating the amount of guarantee it wants to receive and the minimum coverage ratio it is willing to accept. 

Coverage ratios fluctuated around 70 percent before the financial crisis, increased to about 80 percent during 2009 

and 2010, but recently declined to pre-crisis levels. Banks pay a premium that depends on their historical default and 

claims performance and that typically varies between 1 and 2 percent of the outstanding balance. Banks with high 

default rates can be excluded from the scheme. FOGAPE has been financially sustainable, due to the auctioning of 

coverage ratios, the risk-related fees, and a very reasonable average net loss ratio of 1.5 percent of guarantees. A 

number of empirical studies have concluded that the scheme provides additionality and has a positive developmental 

impact. During the financial crisis, the Chilean Government increased FOGAPE’s capital by a significant amount 

to enable the scheme to play a substantive countercyclical role. In 2010 FOGAPE’s volume of guarantees to MSMEs 

reached USD 1.8 billion for a total financing of around 2.7 USD billion. 

Example of a Lower-Middle-Income Country: The European-Palestinian Credit Guarantee Fund (West Bank/Gaza) 

The European-Palestinian Credit Guarantee Fund (EPCGF) was created in 2005 and funded by the German 

Government, the European Commission, and the European Investment Bank. It was designed to jumpstart SME lending 

in a very challenging environment that had resulted in very limited bank lending and practically no lending to 

SMEs. It targets SMEs with less than 20 employees but avoids start-ups due to the perception of excessive risks in 

this segment. The scheme provides a coverage ratio of 60 percent, a maximum loan amount of USD 100,000, and a 

1 percent up-front fee complemented by a 1.5 percent annual commission on the outstanding guarantee. It provides 

guarantees on loans with maturities from 1 to 5 years and does not impose interest rate caps. It has streamlined procedures 

for approval of guarantees and payment of claims that enhanced its credibility among banks. The guarantees 

are not disclosed to the borrowers in order to enhance discipline. 

Example of a Low-Income Country: The SME Credit Guarantee Facility for Afghanistan (Afghanistan) 

The SME Credit Guarantee Facility for Afghanistan was created in 2005 and funded by the United States Agency for 

International Development (USAID) and the German Government. Like its Palestinian counterpart, it was created to 

jumpstart SME lending in a challenging environment and shares some of characteristics. It provides a coverage ratio 

of 72 percent, charges risk-related fees, does not impose interest rate caps, and does not disclose the guarantees to 

the borrowers to enhance discipline. Also like the Palestinian scheme, it introduced from the start a substantive 

capacity-building program, including assistance to the establishment of dedicated SME units in the banks. It succeeded 

in boosting SME lending from negligible levels and has an NPL ratio of only 1.3 percent of the outstanding 

stock of guarantees. The program has provided financing for USD 37 million, reaching more than 1,200 SMEs.


Mutual guarantee institutions have a similar structure 

in most European countries and seem to have contributed 

to more access to credit and lower interest rates 

for participating SMEs. However, recent research of 

Italian mutual guarantee institutions also shows that 

these institutions produce better outcomes where they 

remain local and private. An increase in the number of 

firms/shareholders tends to create free riding problems 

and erode the positive selection and peer-monitoring 

effects. The increased participation of the state in the 

funding of mutual guarantee institutions also tends to 

erode peer monitoring and payments discipline. 63 These 

are important findings for other countries envisaging 

this type of guarantee scheme. 


As mentioned in the preceding section, the enabling 

environment for finance in LDCs tends to be weak, 

due to deficient institutional and legal frameworks, 

Box: Key Features of Well-Designed Credit Guarantee Schemes 64 

Eligibility criteria: Guarantee schemes should target SMEs through reasonable ceilings on turnover, number of 

employees, and/or size of the loan. However, restrictions on sectors or types of loans should be avoided. 

Approval rules and procedures: Approval procedures should be streamlined and result in final approval or rejection 

of the application within a period of two weeks. 

Collateral and equity rules: PCGs should be allowed to require collateral, although subject to reasonable limits, and 

should be allowed to require minimum equity for riskier exposures. 

Coverage ratios: Coverage ratios should ensure sufficient protection against default risk while maintaining strong 

incentives for effective loan origination and monitoring. Coverage ratios ranging from 50 to 80 percent are common, 

with ratios typically increasing with the maturity of the loans (lower for working capital loans, higher for investment 

loans) and decreasing with the age of company (higher for start-ups, lower for more established firms). 

Fees: Fees should be risk-based and contribute to the financial sustainability of the scheme. 

Payment rules and procedures: Payment rules should take into account the effectiveness of the collateral and insolvency 

regimes. Schemes in developed countries can base payments on realized losses, but schemes on most emerging 

countries need to base payments on default events while ensuring incentives for effective debt collection. 

Risk management: Strong risk management capacity is key to ensure that guarantees reach targeted borrowers and 

ensure the financial sustainability of the scheme. 

Capacity building: PCGs can play a fundamental capacity building role in LDCs, for SMEs, and commercial banks. 

Evaluation mechanism: Comprehensive evaluation mechanisms are best practices to measure a PCG scheme’s 

achievements in terms of outreach, additionality, and sustainability. 

Supervision: Many PCGs are supervised by central banks in order to ensure the soundness of their operations. 

Risk weighting for banks’ prudential requirements: A well-designed and financially robust guarantee scheme 

should allow bank regulators to assign a lower risk weight to exposures that are covered by the guarantee. 

63 Columba, Francesco, Leonardo Gambacorta, and Paolo Emilio Mistrulli. 2009. “Mutual Guarantee Institutions and Small Business 

Finance.” BIS Working Papers No. 290, Bank of International Settlements, Basel. 

64 See, e.g., Green, Anke. 2003. “Credit Guarantee Schemes for Small Enterprises: An Effective Instrument to Promote Private Sector-Led 

Growth?” Working Paper No. 10, United Nations Industrial Development Organization; available at http://www.unido.org/fileadmin/ 

import/18223_PSDseries10.pdf; and Saadani, Youssef, Roberto Rocha and Zsofia Arvai 2010, “Assessing Credit Guarantee Schemes in 

the Middle East and North Africa,” World Bank, available at http://blogs.worldbank.org/files/allaboutfinance/MENA%20Flagship%20 

Credit%20Guarantee%20Schemes%20Final.pdf


59 

poor financial infrastructure, and limited supervisory 

capacity. Well-designed and targeted policy 

interventions may be well justified in these cases. 

Moreover, credit guarantee schemes may be one of 

the most effective mechanisms to address market failures 

and expand SME lending, as they rely primarily 

on private banks for screening and monitoring potential 

SME borrowers. 

At the same time, the low institutional development 

and human resource constraints of LDCs imply a 

limited capacity to run these schemes effectively. In 

addition, private banks may have better incentives 

than state banks to screen and monitor potential 

borrowers, but may lack the human resources and 

technologies to conduct these activities effectively. 

These limitations have important implications for 

the formulation of the objectives of guarantee 

schemes in LDCs, as well as the design of their rules 

and procedures. More specifically, capacity building 

should be one of the key objectives of PCGs in LDCs. 

Also, the low institutional capacity of LDCs implies 

the need for simpler scheme designs. Finally, 

introducing effective guarantee schemes in LDCs 

requires substantial technical assistance from 

donors, especially in the early stages of implementation. 

Afghanistan and Palestine provide relevant 

examples of PCGs that have performed well in challenging 

environments. 

SMEs’ Access to Public Procurement in 

the EU 

A recent European Commission study estimates the 

total value of contracts awarded in the EU for the period 

2006-2008 at about 876 billion euro. From this total, 

the estimated total value of contracts awarded to SMEs 

is 34 percent. The differences among countries are 

large. Countries with high SME shares are Bulgaria, 

Latvia, Malta, Luxembourg, and Greece, ranging from 

79 percent in Bulgaria to 52 percent in Greece. Countries 

with low SME participation are Czech Republic, Spain, 

Portugal, and the United Kingdom, all with less than 25 

percent. As a general trend, SMEs are more dominant in 

smaller countries. 

The share of SMEs in public procurement is 18 percentage 

points lower that their overall share in the EU economy, 

calculated on the basis of their combined turnover 

(52%). But performance differs according to SME size. 

While the medium-sized enterprises’ share of public 

procurement (17%) is close to their share in the economy 

(19%), the micro and small enterprises lag considerably 

behind their role in the economy. Micro- enterprises 

account for about 6 percent of the contract value in 

public procurement versus a 17 percent of total turnover, 

while small enterprises trail behind by 5 percentage 

points. This indicates that micro and small firms 

face more barriers to accessing public contracts than 

do medium-sized firms. 

Source: Evaluation of SMEs’ access to public procurement markets 

in the EU, 2010 

C.3.4 GOVERNMENT PROCUREMENT FROM 


The public sector is a significant buyer of services 

and goods from SMEs, with common examples 

being repair and maintenance contracts, office supplies, 

catering supplies, transport services, and so 

on. Governments also provide indirect payments in 

the form of benefits, salaries, or pensions, to households 

of SME entrepreneurs. SMEs have potential to 

use invoices and supply contracts with the public 

sector, as with the private sector, to secure access to 

financing, for example through factoring, or through 

use of the contract as collateral for a loan. The 

government can introduce mechanisms to facilitate 

this access to finance, as outlined in this section. 

Governments can also adopt a critical lesson learned 

from the recent global financial crisis, which is that 

by paying SMEs promptly, and expanding the proportion 

of goods and services procured from SMEs, 

governments can contribute directly to SME creditworthiness 

and viability. For example, as a result of 

the global financial crisis, SMEs in OECD countries 

were confronted with a decrease in demand for goods 

and services, and an increase in payment delays on 

receivables. This resulted in a shortage of working


Facilitating Business Transactions through Public Trading Platforms: Chile Compra 

Chile Compra is a public, electronic system for purchasing and hiring that started operations in 2003. It is based on 

an internet platform and caters to companies, public organizations, and regular citizens alike. Currently, Chile Compra 

is the largest business-to-business site in Chile, with more than 850 purchasing organizations, including businesses, 

government ministries, public services, hospitals, municipalities, the military, the Lower Chamber of the Chilean 

Parliament, and universities. 

In an average month, 40,000 companies are registered and more than 150,000 business negotiations transacted. A 

total of 8,141 government employees use this system. During 2010, registered companies announced 365,397 purchases 

and issued 1,894,477 purchase orders. 2010 ended with US$6.5 billion in transactions. 

Registered companies are mostly microenterprises (68 percent of the total) and SMEs (29 percent). Large firms only 

make up 3 percent. However, large firms provide 45 percent of the total volume purchased, SMEs 37 percent, and 

microenterprises 18 percent. The share of micro and small firms is remarkable, as their participation in government 

purchases is double their overall share in the Chilean economy. 

The Chile Compra system is exposing some of the myths associated with the use of advanced technology, by actively 

involving everyday people, and low-income microenterprise operators, who are entering the electronic trade 

platform. 

Sources: Rioseco, and Andrés Navarro Haeussler. 2006. “Information and Communication Technologies in Chile: Past Efforts, Future 

Challenges.” Global Information Technology Report 2006, Hampshire: Palgrave, Macmillan. pp. 71–87. Analiza Chile Compra webpage. 

capital and decrease in liquidity. According to an 

OECD study, 65 43 percent of surveyed SMEs in Belgium 

experienced extended delays in their receivables, and 

in the Netherlands 50 percent of SMEs have to deal 

with longer payment terms from their customers. In 

New Zealand, the share of enterprises waiting over 

60 days for payment rose dramatically from 4.8 percent 

to 29.5 percent between February 2007 and 2008. 

Good Practices, Examples 

Governments can stimulate factoring and other sources 

of supply chain finance by creating a supportive regulatory 

and legal environment, such as electronic security 

and signature laws necessary for the quick and 

electronic sale of accounts receivable. Market structures, 

or platforms, can also be set up to facilitate 

supply chain and factoring transactions with SMEs. 

Mexico’s NAFIN platform for factoring and value chain 

finance (outlined in section C.1.3), includes 

government invoices and contracts with SMEs. NAFIN 

facilitates a form of “reverse” factoring, whereby SMEs 

access finance based on the buyer’s creditworthiness, 

as well as access to earlier stage supply chain credit. 

SMEs can also register as providers to the public sector, 

and access information, e-learning, and contracting 

opportunities through the NAFIN platform. 

In Chile, the electronic system for government purchases 

known as “Chile Compra” served as an important 

tool in the government countercyclical policy to 

support SMEs. Chile Compra successfully addressed the 

objective of facilitating access of the domestic small 

companies to government purchases opportunities. The 

share of MSMEs in the total volume of purchases 

increased from 49 percent in 2007 to 55 percent in 

2010. The share of SMEs in government purchases is 

almost double the figures for the whole economy. Chile 

Compra contributed with savings of $180 million on 

government purchases and decreased suppliers transaction 

costs by $65 million in 2009. Further, the public 

65 The Impact of the Global Crisis on SME and Entrepreneurship Financing and Policy Responses. OECD 2009.


61 

market contributed with 50,000 direct jobs and about 

200,000 indirect jobs in 2009. 66 

To address the problem of payment delays by government 

to SMEs, and the possibility that delayed payments 

might lead to insolvencies, specific measures 

introduced by some OECD countries are: 

i) Legal moves to shorten payment delays and 

enforce payment discipline (France); and 

ii) Reduction of government payment delays 

(Australia, France, Hungary, Italy, the Netherlands, 

New Zealand, and United Kingdom). 

For example the U.K. government has cut payment 

delays to 10 days. Other governments are paying their 

SMEs suppliers within 30 days or less, and the European 

Commission is revising the directive on payment 

delays in view of improving payment behavior. 67 


This approach can have particularly high impact where 

SMEs are not well connected to supply chain finance, 

as is the case in many LDCs. Governments can use 

their role as buyers of goods and services from SMEs to 

link those SMEs to factoring, discounting, and contract-based 

financing. This in turn links SMEs to financial 

services more broadly as an indirect result of 

improving their credit record. 

While some countries are already reforming the public 

procurement rules to provide a level playing field for SMEs 

bidding for public contracts, 68 significant efforts may still 

be required to change public procurement practice and 

dismantle many barriers that discourage SMEs from 

responding to tenders or even lead them to avoid such 

opportunities altogether. These include difficulties in 

obtaining information, lack of knowledge about tender 

procedures, the large size of the contracts, a short time span 

to prepare proposals and the cost of preparing them (since 

many costs are fixed, SMEs face disproportionately high 

costs in comparison with larger enterprises), high administrative 

burdens, or unclear jargon used in tenders. 

C.3.5: SME CAPACITY, CREDITWORTHINESS 

SMEs create jobs and income, contribute to poverty 

reduction, and help build a market-oriented economy. 

While SMEs are a major source of employment and 

income for all countries, they are particularly important 

in developing economies, where SMEs have the 

largest share of employment and job creation. 69 


typically represent more than 90 percent of all firms 

outside the agricultural sector 70 and are responsible for 

more than 60 percent of employment and 60 percent 

of GDP in developing economies. 71 

The importance of SMEs in developing markets contrasts 

with the multitude of constraints they face. 

Developing-economy SMEs face an inter-related set of 

barriers that hamper their productivity growth, and 

thus their ability to contribute to economic and social 

development. Barriers to SME development fall into 

three general categories: business environment, knowhow, 

and finance. 72 

Problems in any one category tend 

to compound the obstacles in other areas. For example, 

limited managerial skills impede access to financial 

resources, and a poor business climate discourages 

SMEs from investing in competitiveness. 

Research suggests that firms in emerging markets tend 

to have poorer management practices than those in 

66 According to the Chile Compra Strategic Plan 2010-2012. 

67 See The Impact of the Global Crisis on SME and Entrepreneurship Financing and Policy Responses. OECD 2009 

68 Such as the 2004 EU Directives reforming the public procurement rules 

69 Meghana Ayyagari, Asli Demirguc-Kunt and Vojislav Maksimovic, “Small vs. Young Firms across the World: Contribution to Employment, 

Job Creation, and Growth,” The World Bank Development Research Group (April 2011): 4. 

70 “Promoting SMEs for Development: The Enabling Environment and Trade and Investment Capacity Building,” DAC Journal, Vol. 5, No. 2 

(2004): 29. 

71 “Why Support SMEs?” International Finance Corporation, World Bank Group (2010): 3. 

72 Michael Klein, “Promoting Small and Medium Enterprises: Their Importance and the Role of Development Finance Institutions in 

Supporting Them,” The Atrium Dialogues, DEG KfW Bankengruppe (November 2010): 12-13.


figure 3 Management Scores across 

Countries 

China 

India 

Greece 

Brazil 

Poland 

Great Britian 

Japan 

Sweden 

Germany 

United States 

2.50 2.60 2.70 2.80 2.90 3.00 3.10 3.20 3.30 3.40 

Source: Bloom and Van Reenen (2010) Management scores, 

from 1 (worst practice) to 5 (best practice) 

developed economies. 73 Figure 5 highlights this gap in 

managerial skills between developed and developing 

markets. 

Several recent studies clearly demonstrate the impact of 

capacity building on management performance. For 

example, access to management training and consulting 

improved the productivity and increased the profitability 

of SMEs in the textile industry in India. 74 

Similarly, a 

group of micro businesses and SMEs in Mexico saw 

increases in productivity, sales, and profitability after 

participating in management consulting. 75 The conclusion 

is that managerial capital can be transmitted 

through such capacity-building services as training and 

Example: Management Matters – Evidence from India and Mexico 

A longstanding question in management science is whether differences in firm performance can be attributed to 

differences in management technique – does management matter? Several researchers have sought to answer this 

question by conducting experiments with small businesses in emerging markets. 

Bloom et al. investigated the impact of improved management practices on firm outcomes in India’s textile industry. 

They offered free management consulting to 28 textile plants and compared the performance of these plants against 

a control group that did not receive consulting services. The researchers observed that the firms that engaged management 

consultants increased productivity on average by 10.5 percent and profitability by 16.8 percent, primarily 

through higher efficiency and lower inventory levels. The study also found that lack of information was a key barrier 

to adoption of modern management practices. This suggests that training programs have a role to play in helping 

firms understand first how quality control, planning, and inventory management (among other practices) can 

improve business performance in general, and then how such practices can be applied profitably to their specific 

businesses. 

A similar study was carried out by Bruhn et al. in Puebla, Mexico, where micro businesses and SMEs (MSMEs) were 

offered subsidized management consulting services. Participating firms spanned the manufacturing, commerce and 

trade, and services sectors. Compared to a control group, firms that received management consulting saw a significant 

increase in their productivity and return on assets. Sales and profits also increased by more than 70 percent on 

average for those that worked with consultants (though this was influenced by a few outliers). The investigators even 

witnessed an improvement in intermediate business process variables: firms in the treatment group were 13 percent 

more likely to have launched a new marketing campaign and 7 percent more likely to keep formal accounts. 

Sources: Nicholas Bloom, Nicholas, Benn Eifert, Aprajit Mahajan, David McKenzie and John Roberts, “Does Management Matter? 

Evidence from India,” The World Bank Development Research Group (February 2011). 

Miriam Bruhn, Dean Karlan, and Antoinette Schoar, “Returns to Management Consulting for Micro, Small and Medium Size Enterprises 

in Mexico,” Innovations for Poverty Action. 

73 Nicholas Bloom and John Van Reenen, “Why do Management Practices Differ across Firms and Countries?” Journal of Economic 

Perspectives, Vol. 24, No. 1 (2010): 209. 

74 Nicholas Bloom, Benn Eifert, Aprajit Mahajan, David McKenzie and John Roberts, “Does Management Matter? Evidence from India,” The 

World Bank Development Research Group (February 2011). 

75 Miriam Bruhn, Dean Karlan, and Antoinette Schoar, “Returns to Management Consulting for Micro, Small and Medium Size Enterprises in 

Mexico,” Innovations for Poverty Action.


63 

consulting. Improving SME business outcomes is a key 

reason to provide capacity building, as such improvements 

help generate economic growth and jobs. 

Standards, Guidelines and Good Practice 

An enabling business environment is the supporting 

architecture for a dynamic SME sector. Research from 

more than 45 developing and OECD countries indicates 

that when the enabling environment becomes 

more business friendly, SMEs will be able to build 

managerial capacity and access financial resources. 76 

SME development “requires a crosscutting strategy” 77 

that is embedded in broader national goals concerning, 

for example, economic growth, poverty reduction, 

and women’s participation in business. Such a 

strategy should promote responsible macroeconomic 

policies on inflation and exchange rates – fluctuations 

in both have been found to impact SMEs more than 

large businesses. 78 

SMEs also benefit from an enabling 

microeconomic environment, which is the level at 

which firms interact with institutions, organizations, 

and markets. A sound microeconomic climate includes 

good governance, transparent legal and regulatory 

regimes, and access to a skilled workforce. Both macro 

and micro environments can improve SMEs’ capacity 

to launch competitive business strategies. 79 

In SME market development, capacity-building services 

should be delivered to SMEs through experienced 

local partners (e.g., training firms, banks, and consultants) 

rather than by governments, development institutions, 

or donors. There are several benefits to this 

practice: i) it leverages the market knowledge of local 

intermediaries who are better positioned to meet SME 

needs; ii) it helps build markets for SME advisory services, 

rather than crowd out the private sector; and iii) 

Example: IFC’s Business Edge – Filling a 

Gap in the SME Training Market 

Business Edge is an IFC-owned training system designed 

to improve the management skills of SME owners and 

managers. This classroom-based program offers practical 

management training that is adapted to the local 

business context and delivered by a network of local 

partners. The goal of Business Edge is to improve the 

performance and competitiveness of SMEs in order to 

generate jobs and income in the local economy. By 

using a franchise model, IFC avoids distorting the 

market, instead acting as a facilitator to strengthen the 

capacity of local training providers. 

Business Edge is a world-class training system that 

localizes global best practices in business management. 

The program consists of 36 different workshops and 

management workbooks in marketing, human 

resources, production and operations, finance and 

accounting, and productivity skills. It incorporates 

material sourced from the global market and is customized 

to fit the local business environment in terms of 

both training methodology and content (e.g., Arabic 

language plus local examples). Training providers are 

selected based on their track record in training and willingness 

to serve SMEs. Trainers use Business Edge 

materials as a core in structuring their own innovative 

training programs. IFC certifies the training providers 

and monitors their performance, thus ensuring that 

quality standards are upheld. 

To date, more than 650 Business Edge trainers have 

instructed 137,000 individuals across 27 countries. The 

program has also helped brands like Microsoft and 

Novartis achieve their supply chain development goals. 

it amplifies the number of enterprises reached, as well 

as the efficiency with which they are reached. 80 

Such 

an approach leads to capacity-building services that are 

both sustainable and scalable. It works by creating 

76 Michael Klein, “Promoting Small and Medium Enterprises: Their Importance and the Role of Development Finance Institutions in 

Supporting Them,” The Atrium Dialogues, DEG KfW Bankengruppe (November 2010): 4. 

77 “Promoting SMEs for Development: The Enabling Environment and Trade and Investment Capacity Building,” DAC Journal, Vol. 5, No. 2 

(2004): 42. 

78 Ibid., 43. 

79 Ibid., 43-44. 

80 “Business Development Services for SMEs: Preliminary Guidelines for Donor Intervention,” Summary of the Report to the Donor 

Committee for Small Enterprise Development (January 1998): 8, 20.


Example: Start and Improve Your 

Business – ILO Helps Small Businesses 

Reach Their Potential 

Example: Turk Economici Bank – A First 

Mover in Providing Non-financial 

Services to SMEs 

Since 1991, the International Labour Organization’s (ILO) 

Start and Improve Your Business (SIYB) program has 

been helping would-be entrepreneurs launch and 

expand their businesses. The SIYB program is aimed at 

creating more and better employment opportunities in 

emerging markets through the development of the 

micro and small enterprise (MSE) sector. 

Like IFC’s Business Edge, SIYB strengthens – rather than 

displaces – the local market for capacity-building services. 

It relies on a network of qualified partner organizations 

(POs) to deliver business management training 

across more than 80 countries. The ILO has implemented 

a “train the trainer” model that ensures POs are 

qualified to provide training to MSEs. 

Using appropriate adult training methodologies, SIYB 

takes enterprises through the entire process of starting 

and managing a business, beginning with a course on 

how to develop an idea for a business. The program 

continues with “Start Your Business,” an interactive 

module that walks entrepreneurs through the development 

of a feasible business plan. The third course, 

“Improve Your Business,” helps firms establish basic 

management systems, including financial management, 

costing and marketing. The final course, “Expand Your 

Business,” is aimed at MSEs that are growth oriented. It 

relies on training and other mechanisms to help businesses 

develop and launch a growth strategy. 

Turk Economici Bank (TEB) was among the first 

banks in Turkey to recognize that providing capacitybuilding 

support to SMEs could have enormous 

potential in building a client base of healthy businesses, 

increasing customer loyalty, and decreasing 

credit risk in the SME sector. In 2005, TEB began 

offering training services through its SME Academy. 

The primary goal of training is to build SME competitiveness 

and strategic planning capabilities. It also 

helps SMEs take a market-centric approach to their 

businesses, giving them the tools to identify and 

respond to new opportunities for products and services. 

In 2008, TEB began to complement its “lowtouch” 

training with “high-touch” one-on-one 

management consulting delivered through a cadre of 

trained relationship managers. 

TEB has emerged as a leader among Turkish banks 

in experimenting with innovative non-financial 

approaches to SME capacity building. Its capacitybuilding 

support has resulted in a decrease in loan 

delinquency rates in its SME portfolio, in addition to 

new client acquisition and greater customer loyalty. 

Driven by its success in Turkey, BNP Paribas (one of 

TEB’s largest shareholders) has replicated aspects 

of this non-financial business model in other emerging 

markets. 

Source: Turk Economici Bank, 2011 

Source: International Labour Organization, 2010 (www.ilo.org) 

models that can be delivered by the private sector in a 

programmatic way on a regional or global basis. 

Holistic Approach 

The hurdles facing SMEs are complex and inter-related 

and therefore will not be solved by one type of intervention. 

The impact of access to finance can be amplified 

through greater managerial bandwidth. A private 

sector example of a holistic approach is South Africa’s 

Business Partners, 81 

an investment fund that targets 

small entrepreneurs in Africa. Its strategy hinges on 

assessing the technical assistance needs of potential clients 

and making their acceptance of an integrated program 

of support a condition of investment. In keeping 

with the principle of intermediary development, services 

are delivered by local partners, and not directly 

81 Making Big Things Happen for Small Businesses: Annual Report 2011, Business Partners. Retrieved July 7, 2011 from http://www. 

businesspartners.co.za/Finresults/AR2011.pdf.


65 

by Business Partners. Following this model of advisory 

services and financing, Business Partners has achieved 

real returns on investment of 7 to 9 percent on its SME 

portfolio for the past 10 years. 82 

The integration of financial and capacity-building services 

can likewise be seen in the SME banking sector. 

Turk Economici Bank (TEB) illustrates how providing 

training and other forms of support to SME clients can 

benefit financial service organizations. 


Capacity-building activities have thus far had mixed 

results in developing economies. Market gaps remain 

in the provision of relevant support services to SMEs. 

This is due to both demand and supply issues. On the 

demand side, local SMEs might not be convinced of the 

relevance of such services and therefore might not be 

willing to pay – and even if they are convinced of the 

need, they might not have the ability to pay. On the 

supply side, there is a lack of relevant and affordable 

services in developing markets. Where services do 

exist, they are often delivered through lecture mode, 

thus limiting the transfer of skills to participants. 

Content might be confined to western approaches that 

are inappropriate for the local environment. Even 

when content and delivery mechanisms are suitable 

for the environment, service providers typically focus 

on large corporate entities, thus helping to perpetuate 

the “missing middle” of small- and medium-sized 

businesses in developing economies. 

Much of the failure around capacity building has been 

the result of untargeted interventions that attempt to 

apply practices that work for one SME market segment to 

other segments. For that reason, recent efforts – such as 

those by IFC and the ILO – have focused on customizing 

content for particular groups of entrepreneurs (e.g., 

growth-oriented enterprises, women entrepreneurs, 

and disadvantaged groups). These efforts, however, are 

often stymied by national agendas that neglect or even 

disempower certain segments of the population. For 

example, women play an important role in reducing 

poverty and contributing to economic and social objectives. 

In many developing countries, the SME sector 

employs large numbers of women (roughly 40 percent 

of African SMEs are owned or managed by women). 83 

Yet national and local policies frequently place roadblocks 

to women’s full participation in the SME sector. 

A related challenge concerns the tension between 

public and private interests. Good practice generally 

states that SME support services should be delivered by 

private organizations on a commercial basis. This 

approach, however, overlooks the economic role 

played by disadvantaged groups who might not have 

the resources to avail themselves of such services. A 

strictly demand-driven approach means that those 

with the most demand for the services – and ability to 

pay – will benefit more than others. For this reason, 

governments and other public sector bodies have a role 

to play both in financing the development of new 

interventions that benefit entire swathes of SMEs, and 

in raising SME awareness of the need for better management 

practices. Public-private partnerships (PPPs) 

are one way to ensure that capacity-development services 

are delivered by private actors for the benefit of 

private actors, while still meeting broader societal 

objectives. PPPs can address SMEs’ growth problems 

through the combined efforts of public, private, and 

development organizations working together to 

improve technological capabilities and human capital. 

Benchmarking and program evaluation continue to 

pose challenges to SME support providers. Compared 

to fields like microfinance, relatively little has been 

done in capacity building to establish common metrics 

for performance assessment. 84 

The need for tailored, 

context-specific interventions contrasts with the 

82 Tom Gibson and Hugh Stevenson, “High-Impact Gazelles: Should They Be a Major Focus of SME Development?” (April 2011): 10. 

83 Why Support SMEs?” International Finance Corporation, World Bank Group (2010): 16. 

84 Business Development Services for SMEs: Preliminary Guidelines for Donor Intervention,” Summary of the Report to the Donor 

Committee for Small Enterprise Development (January 1998): 9.


desirability of scalable, standardized approaches that 

facilitate comparison between different service providers 

and different impacts. Donor agencies, development 

institutions, and service providers must work 

together to achieve the right balance between market 

segmentation and scalable business models that can be 

objectively assessed using quantitative indicators. 

C.4: Women and SME Finance 

In a recent study, McKinsey estimated the financial 

credit gap that women business-owners face to be 

between USD $292 to 357 billion, representing 30 percent 

of the total SME credit gap for formal SMEs. 

Women entrepreneurs are also more likely to cite access 

to finance as the first or second barrier to developing 

and growing their businesses. In addition, relative to 

men, women tend to have less access to finance and 

other resources, along with issues of rights and voice. 85 

Women entrepreneurs make significant contributions 

to their economies. Across regions, between a quarter 

and a third of registered small businesses have a 

female owner. These firms represent a significant 

share of employment and value added. However, the 

potential for greater growth of women’s businesses is 

not always realized. While women’s entrepreneurship 

is high in developing countries, it is largely skewed 

towards smaller firms. Women entrepreneurs are 

more likely to be in the informal sector, running 

smaller firms and operating in lower value added sectors 

than their male colleagues. They are more likely 

to be home-based and operate within the household 

than are male-headed enterprises. 

With access to finance an important means to pursuing 

greater opportunities, addressing gender gaps in access 

to finance must be part of the development agenda. 

Across regions, women have lower access to finance 

than men. In addition to being less likely to have a 

loan, women often face less favorable borrowing 

terms. Many country studies show that women entrepreneurs 

are more likely to face higher interest rates, 

be required to collateralize a higher share of the loan, 

and have shorter-term loans. 

Both non-financial and financial barriers can contribute 

to gender gaps in access to finance. Non-financial 

barriers can include characteristics of the entrepreneurs 

(e.g., differential access to education or management 

training); conditions in the broader business 

environment that may differentially affect women’s 

and men’s businesses (e.g., the legal and regulatory 

environment or the quality of available infrastructure); 

and constraints within financial institutions and a 

country’s financial infrastructure that limit incentives 

to reach out to more female clients. 


Building an effective policy guide to facilitate women’s 

access to finance requires an understanding of the 

existing legal framework, in particular the extent to 

which it facilitates property ownership on both movable 

and immovable assets. Property ownership encompasses 

the ability to manage, control, administer, access, 

encumber, receive, dispose of, and transfer property. 

As such, consideration should be given to the extent to 

which the broader legal framework, including family 

codes and inheritance rights, enables women to own 

(and therefore use as collateral) land and movable 

assets. Another factor to examine is whether the law 

discriminates in other ways against women when they 

seek to access finance. For instance, in Cameroon, married 

women have no property rights. The civil code 

states, “The husband alone administers matrimonial 

property … the husband shall administer all personal 

property of his wife” 86 . Similarly, until very recently, 

women in Lesotho were considered as minors and thus 

were ineligible to undertake legal transactions in their 

own right. Considering the broader legal framework 

and its impact on women’s ability to access loans will 

85 Women, Business and the Law, World Bank, 2009 

86 Articles 1421 and 1429 Cameroon civil code.


67 

be critical in ensuring that women proportionally benefit 

from the reform efforts. Local women lawyers’ 

organizations or NGOs promoting women’s rights are 

often well placed to provide assistance in analyzing 

these issues. 

The country’s international treaty obligations and any 

guarantees of equality contained in the constitution 

should also be examined. If legal restrictions on women’s 

property rights or ability to participate in credit 

markets conflict with these overarching obligations, 

the case for reform may be stronger. For instance, the 

Convention on the Elimination of All Forms of 

Discrimination against Women (CEDAW) requires 

states to ensure that women have equal rights to obtain 

bank loans, mortgages, and other forms of credit. The 

Beijing Platform for Action commits to providing 

women with access to finance and credit, and eliminating 

biases against women in finance laws. The 

Protocol to the African Charter on Human and People’s 

Rights on the Rights of Women in Africa commits 

states to create conditions to promote and support the 

occupations and economic activities of women. 

In addition to international commitments, several countries 

extend nondiscrimination provisions enshrined in 

the constitution to apply in the private sphere. The U.K. 

Sex Discrimination Act of 1975 prohibits gender discrimination 

in private transactions to supply goods, 

facilities, and services, including credit. The U.S. Equal 

Credit Opportunity Act of 1974 prohibits discrimination 

on the grounds of gender or race in relation to credit 

applications. It was extended by the Women’s Business 

Act of 1988 to include business loans. 

IFC: Women In Business Program 

IFC recognizes that aspiring businesswomen are often prevented from realizing their economic potential; IFC is committed 

to creating opportunities for women in business. Through its Women in Business (WIN) program (formerly 

known as Gender Entrepreneurship Markets), IFC aims to mainstream gender issues into its work, while helping to 

better leverage the untapped potential of both women and men in emerging markets. IFC provides financial products 

and advisory services to: 

• Increase access to finance for women entrepreneurs; 

• Reduce gender-based barriers in the business environment; and 

• Improve the sustainability of IFC investment projects. 

Thus far, IFC has worked with more than 16 banks to enhance their ability to provide more targeted products and 

services to women entrepreneurs. Through this intervention, IFC has invested over $118 million, of which over $86 

million have been on-lent to women entrepreneurs. Well over 2,200 women entrepreneurs have had the opportunity 

to increase their business and financial management skills. 

USAID’s DCA (Development Credit Authority) and Kenya Commercial Bank 

USAID partners with Kenyan financial institutions to encourage lending in areas that are under-served due to the 

perception of high risks. Under this partnership KCB - one of the Kenyan banks- has introduced the Grace Loan, 

which is tailor-made for individual women entrepreneurs and women business groups to meet their working capital 

or business expansion needs. Through the Grace loan, women are able to apply for a loan of up to $62,000, repayable 

in up to 36 months. The loan also has an important training component. To access value added services, women 

entrepreneurs get the opportunity to join KCB’s Biashara Club, that among other activities offers workshops on 

entrepreneurship and capacity building, networking possibilities, and business advisory services through SME 

Management seminars and workshops on a variety of relevant topics. Since the launch, the Bank has on-lent over 

USD $1.6 million to 350 women entrepreneurs


Ensuring that the regulatory framework for credit reference 

agencies enables women to establish their own 

credit history, separate from their husbands, is another 

area of good practice. Analysis and reform programs 

should consider whether laws on credit information treat 

women, regardless of marital status, in the same way as 

men; whether the credit history can be established and 

captured through participation in microfinance or group 

lending schemes; and the extent to which a married person’s 

assets considered to be consolidated with his or her 

spouse’s assets for the purposes of the credit history. 

In addition to ensuring that women have equal capacity 

by law, facilitating the use of movable assets as collateral, 

guaranteeing that women can build their credit 

histories, and prohibiting gender discrimination in 

relation to credit applications, another consideration is 

a realistic and sustainable enforcement mechanism. 

There is growing evidence that restricted access to 

commercial justice can represent a significant barrier 

for women. Women’s basic commercial rights, such 

property ownership, can be unclear and uncertain, 

and women can face barriers and discrimination when 

they seek to uphold their commercial rights through 

the courts. As such, alternative dispute resolution 

(ADR) mechanisms that are designed in an inclusive 

way so that the existing gender inequities are not perpetuated 

may have a positive effect on women’s ability 

to enforce their contractual rights. 


Many women entrepreneurs face higher and differentiated 

barriers such as gender-discriminating laws and 

customary practices, while also having less access to 

resources, and lower levels of education, training, and 

work experience. In addition, they often face restrictions 

on mobility and generally have more demands 

on their time. Women continue to be concentrated in 

small, low-growth firms, and a disproportionate share 

of women’s businesses fail to mature. This has negative 

implications for growth and poverty reduction in 

developing countries. Understanding the barriers 

women’s businesses face and providing solutions to 

address them is necessary if countries hope to further 

leverage the economic power of women for growth 

and the attainment of development goals. Further, lack 

of access to land title can be a major impediment for 

both men and women. For instance, more than 85 

percent of loans in Kenya require collateral, and the 

average value of the collateral taken is nearly twice that 

of the loan. In the vast majority of cases, the collateral 

required is land, usually land that has a registered title. 

Women hold only 1 percent of registered land titles, 

with about 6 percent of registered titles held in joint 

names. 87 In this respect, reforms of a country’s secured 

lending system to enhance the use of movable securities 

can have a significant impact on access to credit 

across the board. Enabling movable assets—such as 

machinery, book debts, jewelry, and other household 

objects—to be used as collateral can benefit all businesses. 

But opening up this type of financing has the 

potential to be of particular benefit to land-poor 

women, enabling them to circumvent their lack of 

titled land and use the assets they do have to unlock 

access to formal credit markets. 88 

C.5: Agrifinance for SMEs 

There is now a broad consensus for more agricultural 

investments in order to increase food production and 

combat poverty. However, there are no quick political 

fixes, and the provision of sustainable financial services 

for agriculture has proven to be difficult. The past years 

have proven that neither commercial banks nor the 

emerging microfinance industry alone can sufficiently 

meet the financial needs along agricultural value chains. 

Many farmers and agrifinance SMEs are left unserved 

and trapped in the so-called “missing middle” between 

micro- and commercial finance. The old paradigm has 

failed to achieve the desired effects, as top-down government 

interventions to correct market failures 

87 World Bank, Kenya Investment Climate Survey, 2004. 

88 For more discussion on this topic see Simavi et al, Gender Dimensions of Investment Climate Reform, A Guide For Policy makers and 

Practitioners, Module 5, Secured lending, World Bank 2010.


69 

frequently led to government failures. Hence, a new 

market-based approach emerged, which shifted its 

emphasis from allocating cheap capital to creating sustainable 

agricultural financial systems. In this new 

approach, credit subsidies are reduced in favor of market-based 

loans and technical assistance, in order to 

design appropriate products, institutions, and policies. 


Throughout the last decades, clear principles have 

emerged from experience with agricultural finance 

subsidies, and research on the use of these subsidies has 

resulted in guidelines for “smart” or “market-friendly” 

subsidies. These guidelines include the following: 

• Any subsidy should be temporary and transparent. 

• Subsidies should be targeted toward institution 

building and not the borrowers (i.e., interest rate 

subsidies), in order to reduce market distortions. 

• Subsidies should not undermine competition by 

favoring specific institutions. Financial institutions 

should be subsidized where there is natural spillover 

to non-subsidized institutions. 

• Subsidies should be used for the creation of public 

goods that benefit the entire financial sector. 

• The most effective subsidies are smart subsidies for 

capacity building mechanisms and activities in the 

context of innovative financial instruments such as 

value chain finance, credit guarantee funds, and 

warehouse receipts. 

A major building block to bring forward agricultural 

finance is capacity building for both the rural communities 

and the rural financial institutions. In order for farmers 

and agricultural SMEs to become more bankable, and 

to become attractive business partners for banks and 

trading partners, the following steps are useful: 

• Provision of training and extension services in good 

agricultural practices (i.e., knowledge of how -to be 

a good farmer) and market orientation; 

• Provision of training in basic farm economics and 

adoption of a business approach to farming (i.e., 

knowing how to make a business from farming); 

• Financial literacy and financial management training 

(i.e., how to access external financing sources 

and what it takes to become bankable); and 

• A certain degree of organization both at the same 

level (e.g., farmer-based organizations, machinery 

rings or cooperatives) and between actors at different 

levels of value chains (e.g., contract farming schemes) 

in order to facilitate information flows, realize economies 

of scale, and gain bargaining power. 

Rural finance capacity building includes staff training, 

data collection, reform of financial institutions’ governance 

structures, and implementation of adequate risk 

management tools for both commercial banks and nonbank 

financial institutions. The challenge is to successfully 

apply financial techniques to the agricultural sector. 

Commercial banks usually lack agricultural knowledge; 

it is rare to find a combination of a banker and an 

SME agri-specialist. There are two primary ways to 

build agricultural capacities in banks. The first way is 

to build institutional capacities, through extensive 

knowledge transfer and staff training, with the goal of 

developing and implementing the specific risk management 

tools, credit processes, sales channels, and 

product development that are required for adequate 

agricultural lending. The second option is to establish 

linkages between supply chains and banks, and identify 

suitable service providers to assist agricultural 

SMEs in preparing business plans and loan applications, 

thus allowing them to access banking services. 

In the end, there could be some delivery of basic 

extension services to farmers through various intermediaries, 

ultimately linking them back to the bank. 

After years of reforms, specific agricultural banks, especially 

in Asia, have achieved financial sustainability and 

significant outreach. Among the most remarkable success 

stories are Bank for Agriculture and Agricultural 

Cooperatives in Thailand and Land Bank in the 

Philippines 89 . Development banks shifted from purely 

focusing on agricultural toward a balanced multi-sector 

approach that included strict commercialization, 

89 See http://www.baac.or.th/baac_en/index.php, and https://www.landbank.com/ respectively.


domestic resource mobilization, and cost-covering 

operations. Successfully reformed development banks 

might offer a real opportunity for agricultural SMEs. 

Different approaches to reforming public banks can be 

viable and their success depends to a significant extent 

on specific country conditions. Keys for success include 

a strong political will and a coalition to manage and 

bring forward the transformation. 

Several innovations have been introduced to enhance 

rural outreach by reducing transaction costs and avoiding 

high fixed costs of maintaining branches. Examples 

include mobile phone banking, automated teller 

machines, and points–of-sale devices. The basic idea is 

that information and communication technologies 

boost access to finance by radically reducing transaction 

costs in rural areas. The most prominent example 

is the service M-Pesa, provided by the mobile network 

operator Safaricom in Kenya, which has developed 

into one of the largest banks in all of eastern Africa 90 . 

However, the drawback with these innovations is that 

they are new. In most countries, there is no existing 

legislation for mobile phone and agent-based banking. 

Regulators should thus carefully weigh the potential 

risks and benefits in order to allow agents to function 

as an interface between banks and customer. 

Another innovative instrument is value chain finance. 

Internal value chain finance has several advantages 

over conventional agricultural finance: 

• Value chain actors tend to have better knowledge of 

the key risk and profitability factors in a particular 

sub-sector; 

• The bundling of finance with other services, such as 

input supply, extension services and off-take contracts, 

reduces credit risks; 

• Tying credit with commodity flows can reduce 

transaction costs of lending; and 

• Since agribusiness companies tend to provide input 

credit for reasons other than financial intermediation, 

they may tolerate higher levels of loan default 

than financial institutions. 

Generally, the value chain finance approach of prefinancing 

production works best in situations with 

limited competition between buyers. In a liberalized 

market environment, this mainly applies to niche 

market products, products with a single use (i.e., 

banana), and bulky or highly perishable products that 

require immediate processing (i.e., sugarcane). 

The major challenge of value chain finance arrangements, 

internal and external, lies in their high set-up 

Agricultural Leasing: Banco De Lage Landen Brasil 

De Lage Landen (DLL), an international provider of leasing and asset finance, has built up an agricultural finance 

portfolio in Brazil that is nearing $3 billion. This portfolio has been almost completely generated in partnership with 

agricultural equipment vendors. Through BNDES, Brazil’s national development bank, banks and financial institutions 

can provide finance to the agricultural sector at subsidized rates. DLL has distributed more funds than the 

general banks to the agricultural sector. Key for De Lage Landen’s approach are: first, a deep understanding of farming 

and of the agricultural value chain in Brazil; second, a thorough knowledge of agricultural equipment, control 

over its distribution chain; and, knowledge of the collateral value of the equipment and how to remarket it if needed. 

Most leases have a downpayment or another form of clients’ equity in the transaction and a cash-collateralized partial 

guarantee from the dealer. Brazilian farmers want to own their equipment and prefer loans over leasing. 

Source: G20 Policy Paper on Agricultural Finance for Small and Medium Sized Enterprises 

90 See http://www.safaricom.co.ke/index.php?id=250


71 

costs, given that the financing structure and related 

contractual arrangements and procedures for monitoring 

and enforcement need to be tailored to a specific 

situation. Moreover, many financial institutions lack 

sufficient knowledge about value chain financing techniques 

and the skills to apply them. 

Leasing offers the potential to reduce some of the risks 

of traditional loan provision for investment financing 

in agriculture. Leasing can provide an alternative 

financing solution for smallholder farmers and rural 

enterprises with limited collateral and credit history 

for the acquisition of equipment and other production 

assets. It helps to circumvent some of the problems 

related to the registration and foreclosure of collateral 

and can be used for financing machinery and movable 

assets such as vehicles and farm equipment. Since the 

lessor owns the equipment, repossession in case of 

default is more straightforward as it does not require 

court procedures. Leaseback enables rural entrepreneurs 

to access funds by selling a productive asset to 

the lessor, who then leases it back to the lessee. At the 

end of the stipulated period, the lessor sells the asset 

back to the lessee at a pre-determined price. The use of 

leasing and leaseback is greatly facilitated by a suitable 

legal framework stipulating the rights and obligations 

of both parties. However, tax regulations can make 

leasing less lucrative than lending. Despite the advantages 

of leasing in principle, few institutions offer 

equipment leasing and leaseback to rural customers. 

A further policy instrument to stimulate medium- and 

long-term agrifinance lending can be agricultural 

guarantee funds. Guarantees may provide additional 

comfort for financial institutions interested in testing 

the feasibility of lending to a new clientele, but a guarantee 

alone is unlikely to induce additional lending if 

the lenders lack such interest. International agencies 

can perform a valuable service by conducting evaluations 

to determine if and under what conditions guarantees 

produce the expected results and how the details 

of guarantee designs affect performance. It is also critical 

to evaluate whether they distort markets and discourage 

private credit market development. 

Index-based crop insurance shows promise in overcoming 

some of the risk related constraints. Indemnity 

payments are triggered by deviations from an independently 

verifiable indicator such as rainfall data 

measured at local weather stations, and not by on-site 

loss assessments. Weather-index insurance thus offers 

the promise of reducing the administrative, adverse 

selection, and moral hazard problems of traditional 

insurance. Different indices can be used, such as 

rainfall, temperature, or livestock mortality, as long 

as they are highly correlated with regional farm yields 

and are accurately and objectively measurable. 

However, weather index based insurance has its own 

operational challenges. Not all pilot programs have 

been successful and the scalability of the successful 

pilots has not yet been proven. 


The challenges of providing financial services to agricultural 

enterprises are wide ranging, and can be more 

severe in LDC rural sectors. The dispersed location of 

rural clients, the difficulties and high costs of transportation 

and communication, the heterogeneity in 

farming activities, and the level of management skills 

make small farm lending a costly endeavour. The high 

agricultural production risks, further complicated by 

the sensitive political nature of agriculture and domestic 

food production, explain why lending to agriculture 

is risky. All of these challenges are present at 

different levels of the financial system, the policy level, 

the financial infrastructure level, and the level of financial 

institutions. 

Financing agricultural SMEs requires both SME finance 

and knowledge about the agricultural sector. However, 

in many LDCs, financial institutions know very little 

about agriculture and lack the specific agricultural risk 

management skills, suitable products, and term liabilities 

to finance agricultural SMEs. On the demand side, 

agricultural SMEs frequently lack the required financial 

data, business plans, marketing tools, and sufficiently 

powerful projects to convince financial 

institutions to provide adequate funding.


A functioning financial infrastructure reduces the 

information asymmetries and legal uncertainties that 

increase risk to SMEs and constrain the supply of 

finance. However, the LDCs agricultural sector suffers 

from the lack of a solid financial infrastructure, including 

auditing and accounting standards, credit registries/bureaus, 

collateral, insolvency regimes, and apex 

institutions. A weak financial infrastructure is a huge 

challenge for SMEs, as tracking financial information 

builds a credit history and functioning collateral 

regimes reduce adverse selection and moral hazard. 

Missing financial data and standards form a severe 

roadblock for access to SME finance. 

Moreover, the range of available loan products in the 

LDCs agricultural sector is very limited and tends to 

by-pass the real needs of agricultural SMEs. Prevailing 

loans structures are short term, with inflexible 

repayment schemes and traditional collateral 

requirement. However, agricultural activities are 

subject to seasonality and long gestation periods, 

resulting in infrequent cash flows and long-term 

financing needs. Slow rotation of capital results in a 

lower profitability of agriculture and related activities 

when compared to other sectors, such as trade 

and services, with a quick turnover of funds. Hence, 

lenders need to offer longer loan maturities and less 

frequent repayment installments in order to match 

the cash flow of borrowers. This requires more than 

just strong appraisal skills and efficient loan monitoring 

and borrower supervision to manage credit 

risk. Lenders also need to mobilize sufficient longterm 

funding sources in order to minimize asset 

liability mismatches and the associated risks. On top 

of specific funding needs, SMEs in the agricultural 

sector need adequate risk reducing mechanisms in 

order to cope with covariant risks related to weather 

events or price fluctuations.


73 

CHAPTER D 

Recommendations 

Policymakers should design policy measures, legal 

reforms, financial infrastructure improvements, and 

interventions on the basis of diagnostics and data. An 

in-depth understanding of SME Finance constraints is 

necessary to allow prioritization and sequencing, so that 

the most binding constraints are addressed first, and so 

that regulatory and implementation capacity is not overstretched. 

Financial inclusion strategies and country 

action plans can provide the context for effective measures 

to promote SME finance, and for coordination and 

sequencing with other reforms and initiatives. 

D.1. Regulatory and Supervisory 

Frameworks 

Role of Regulators 

The G-20 Report on Financial Inclusion highlights the 

importance of government and regulatory leadership 

in efforts to promote financial inclusion. In the case of 

regulators, this can be through: 

• A proactive approach to addressing regulatory issues 

that constrain SME access to finance, possibly through 

financial inclusion strategies or commitments; 

• Openness to considering innovation; 

• Enforcement of consumer protection measures; 

• Careful attention paid to proportionality in measures 

to maintain the safety and soundness of their 

financial systems; and 

• Effective monitoring and supervision of expanding 

SME finance provision, based on improved data and 

capacity. 

Recommendations set out in the draft GPFI paper 

“Global Standard Setting Bodies and Financial Inclusion 

for the Poor: Towards Proportionate Standards and 

Guidance” provide a reference point for country-level 

regulators. These recommendations note that gradual 

and tailored implementation of standards is appropriate, 

given LDC regulators’ limited capacity and 

resources. The G-20 Principles for Innovative Financial 

Inclusion also highlight the importance of proportionality: 

“Build a policy and regulatory framework that is 

proportionate with the risks and benefits involved in 

such innovative products and services and is based on 

an understanding of the gaps and barriers in existing 

regulation.” Legal requirements should be correlated 

with the differing levels and types of risk involved in 

different activities. Regulations should enable, rather 

than inhibit, appropriate innovation in connection 

with regulated activities, in a way that manages risk. 

Basel II/III and SME Finance 

Recommendations regarding the implementation of 

Basel II in LDCs, with particular reference to the effects 

on SME development, include: 

• LDC regulators should proceed cautiously in implementing 

Basel II. Political support may be needed so 

that LDCs do not rush to implement the more complex 

approaches favored by international banks. 

• LDC regulators need to carefully assess the implications 

of Basel II, for banking stability, for credit 

policy, for access to credit for SMEs, and on competitiveness 

of national versus international banks. 

Capacity problems, issues related to consolidated 

supervision, independence of the supervisor, and legal 

protection for supervisors, should be addressed. Basel 

III reinforces the quantity and quality of capital 

requirements that were introduced under Basel II. It is 

not clear whether or to what extent SMEs would be


more adversely affected than other clients (consumers, 

large corporates) by Basel III, and an objective evaluation 

of the potential impacts may be merited. The 

gradual implementation of the new Basel III rules 

(which are to be fully adhered to by 2019) gives banks 

time to adjust to the new capital requirements. 

Enabling Regulatory Frameworks 

for Alternative SME Finance 

products: Leasing, Factoring 

Factoring is an important source of working capital 

finance for SMEs, and leasing is an important source of 

investment finance for SMEs, especially in jurisdictions 

where the financial infrastructure is deficient. 

A legislative framework for leasing should: i) clarify 

rights and responsibilities of the parties to a lease; ii) 

remove contradictions within the existing legislation; 

iii) create non-judicial repossession mechanisms; iv) 

ensure that tax rules are clear and neutral, removing 

any bias against leasing; and v) clarify the rights of lessors 

and lessees under bankruptcy. 

The laws governing contracts between parties and 

assignment of receivables are most directly relevant to 

factoring. Where these laws are clear and enforceable, 

factoring has developed without any specific legal or 

regulatory framework for factoring as such. A major 

area for decision in a regulatory framework for factoring 

is determining the criteria for the entities who will 

be allowed to perform factoring activities. 

Competition 

Competition can be a powerful incentive for financial 

players to develop their SME business. Based on best 

practices around the world, competition can be promoted 

through the following measures: 

• Financial sector liberalization and banking regulations 

that allow the entry of sound and efficient 

banks and other types of financial providers; 

• A legal and regulatory framework that promotes the 

development of alternative lending technologies 

such as leasing and factoring, as well as the development 

of securities markets and institutional investors 

as an alternative to bank lending; 

• An antitrust authority that oversees decisions pertaining 

to mergers and acquisitions and weighs the 

pros and cons of these transactions; 

• A competition authority that is ready to act against 

potential cartels influencing the pricing of bank 

products; 

• Greater transparency and more information dissemination 

about the pricing and conditions of bank 

products, in order to empower borrowers to make 

good decisions and to “shop for the best deal.” 

Financial literacy could also help borrowers make 

better decisions and would pressure banks to offer 

more suitable products. 

• A consumer protection agency that watches out for 

evidence of anticompetitive behavior of banks and 

takes the matter up with the competition authority; 

• Efforts to improve the scope, access, and quality of 

credit information among banks, which would level 

the playing field between large and small banks 

(including new foreign banks) and allow these 

banks to expand more rapidly; and 

• Complementary prudential regulation, and coherence 

between competition policy and regulation in 

the financial sector, to minimize any potential destabilizing 

effects from increases in competition. 

LDC policymakers often have only a limited range of 

effective tools and capacity, however, to set up or 

enforce competition measures, such as a competition 

authority. In the interim, bank supervisors could be 

given a clear mandate to promote sound competition 

in the banking sector. For example: i) bank regulators 

should give greater weight to sound competition 

when implementing licensing criteria; and ii) 

strengthening the credit concentration regime may 

also contribute to increased competition translating 

into access gains 91 (the latter could be achieved by 

91 World Bank, 2011, MENA Financial Sector Flagship


75 

supervisors applying stricter limits (on an individual 

or portfolio basis) or imposing additional capital 

requirements for banks with higher credit concentrations 

(consistent with risk). 

D.2 Financial Infrastructure 

Secured Transactions 

To create a modern secured transactions system for SME 

Finance, in line with internationally accepted standards, 

emphasis should be placed on the following: 

• Creating unitary legal secured transaction systems vs. fragmented 

laws. Creating or drafting a standalone law to 

regulate all aspects of security interests in movable 

property (secured transactions or personal property 

law) is considerably more efficient and creates less 

conflicts and uncertainty than revising existing provisions 

in multiple laws (commercial code, civil 

code, chattel mortgage law, etc.). 

• Promoting a broad scope in the secured transactions law. States 

should aim at enacting secured transactions laws 

that are comprehensive in scope to provide equal 

treatment to all forms of secured transactions (loans, 

leases, assignment of receivables, consignments, 

retention of title, trusts, etc.), to include all categories 

of debtors (both natural and legal persons) and 

secured creditors, and to allow all types of movable 

assets (tangible, intangible, present or future) and 

secured obligations. 

• Modernizing movable collateral registries. The collateral 

registry is the cornerstone of a functioning and 

efficient secured transactions system. The registry 

fulfills an essential function of the system, which 

is to notify parties about the existence of a security 

interest in movable property (of existing liens) 

and to establish the priority of creditors vis a vis 

third parties. 

• Establishing clear priority schemes for creditors. A clear priority 

scheme is key to determining the sequence in 

which competing claims to the collateral will be satisfied 

when the debtor defaults on one or more of 

the claims. 

• Improving enforcement mechanisms. Enforcement and collection 

of debts upon defaulted loans is a major 

impediment for increasing access to credit. Speedy, 

effective, and inexpensive enforcement mechanisms 

are essential to realizing security interests. 

Enforcement is most effective when parties can 

agree on rights and remedies upon default, including 

seizure and sale of the collateral outside the judicial 

process. 

• Creating awareness and educating stakeholders. Development 

of training and capacity building programs targeting 

public sector (government officials and judiciary) 

and private sector (financial sector, business community, 

lawyers) is essential. 

Insolvency Regimes 

Stronger creditor rights can improve access to finance. 

Bankruptcy regimes regulate the efficient exiting of 

the market, and make the resolution of multiple creditors’ 

conflicting claims more orderly, resulting in more 

extensive opportunities for recovery. Relevant principles 

of insolvency include: 

• A legal framework to address the insolvency of all 

business entities, regardless of their legal form; 

• Simple procedures to open a case and sell assets; 

• Fast-track proceedings for small enterprises with 

low debt values; 

• The ability of small businesses to propose restructuring 

plans to their creditors; 

• The use of mediation or other alternative dispute 

resolution tools to facilitate negotiations between 

debtors and creditors; 

• Provisions for courts to recognize out of court 

settlements; 

• Quick conversion to liquidation for failed 

reorganizations; 

• Decriminalization of bankruptcy; 

• Enhanced capacity for, and oversight of, insolvency 

administrators; and 

• A balanced approach between reorganization and 

liquidation.


Credit Information Systems 

Governments and public authorities have a critical role to 

play in developing an efficient, safe, and reliable credit 

reporting system that covers both identification and relevant 

credit information on both individuals and businesses. 

The result is a system that can seamlessly cover 

micro-, small, and medium-sized businesses and thus 

help lenders better manage credit risk and extend access 

to credit. An effective oversight by the central bank or 

other relevant authorities contributes to addressing failures 

in the functioning of credit reporting systems. 

Steps to develop credit information systems may 

involve the promotion of the following, in line with 

the World Bank credit reporting standards: 

• Establishment of a clear, proportionate, non-discriminatory 

legal framework supportive of consumer 

rights; 

• Establishment of an effective oversight of credit 

reporting systems identifying a primary overseer 

and coordinating efforts among all relevant 

authorities; 

• Ensuring that relevant and sufficient information is 

included in the credit reporting systems as well as 

appropriately used; 

• Provision of data electronically and in real time; 

• Rapid updating and processing of credit report 

information (positive as well as negative); and 

• Provision of additional services such as credit scores 

by credit reporting service providers. 

Payment Systems 

The Committee on Payments and Settlement Systems 

(CPSS) has identified a set of overall strategic goals and 

objectives for retail payment systems, based on the key 

public policy objectives of efficiency and reliability. 

The following actions should be considered to support 

SME finance: 

• Extend availability and choice of electronic payment 

instruments and services; 

• Promote broad-based and affordable access to electronic 

payment instruments; 

• Increase competition between providers of payment 

services; 

• Increase cooperation between providers and develop 

mechanisms for market coordination; 

• Strengthen oversight of retail payment systems; 

• Promote the use of technology; 

• Improve transparency and financial literacy among 

SMEs; 

• Strengthen cross-border payment systems; and 

• Remove policy, legal, regulatory, and administrative 

impediments to the expansion and development of 

payment system technologies. 

Equity Investment 

Increasing SME access to equity markets can involve a 

range of interventions, including: i) improvements in 

disclosure and governance; ii) improvements in minority 

shareholder protection; and iii) a stronger domestic 

institutional investor base and greater participation of 

foreign investors, which may require the relaxation of 

limits on foreign ownership of listed companies in some 

countries. Setting up SME stock exchanges or junior 

markets can under certain circumstances further 

improve the supply of equity investment to SMEs, with 

the following pre-requisites: 

• The underlying legal and capital market regulatory 

frameworks are reasonably well-developed, robust 

and, above all, trusted by investors; 

• Access to credible corporate information on SMEs is 

widely and readily available; 

• A reasonably broad spectrum of early-stage equity 

capital is available from angel, venture capital, and 

private equity investors; and 

• The size of both the private sector and the 

qualified institutional investor community is 

sufficiently large to support the growth of the 

market generally. 

Public or development finance to catalyze or provide 

equity-type financing for innovative and high potential 

SMEs can be needed in the interim to compensate for 

the lack of available VC financing and access to equity 

markets for many such SMEs in LDCs.


77 

Accounting and Auditing Standards 

for SMEs 

The lack of transparency of SME accounting and 

financial statements makes them risky borrowers and 

thus less attractive to lenders. Capacity building of 

SMEs in terms of preparing financial statements and 

business plans, as well as improving their financial 

literacy and management training, may have a positive 

impact on SME development. Care should be 

taken in applying rigid and potentially harmful 

reporting standards to smaller enterprises, which 

could be counter-productive. 

A clear case can be made in favor of simplified 

accounting and financial reporting framework for 

smaller enterprises, with requirements commensurate 

with their size, the types of transactions they 

conduct, and their limited range of stakeholders. A 

“one-size-fits-all” approach to financial reporting and 

auditing requirements ignores the capacity constraints 

that SMEs face and unnecessarily increases 

the cost of doing business for those enterprises, 

which generally drive economic growth. In addition, 

by increasing the requirements for SMEs, governments 

may create disincentives for businesses to 

operate in the formal sector. A holistic approach 

would take into account SMEs’ need for relief from 

excessive accounting and auditing requirements, as 

well as their need for more time to implement appropriate 

standards effectively. 

While increased transparency for SMEs is central to 

improving access to bank financing, improved financial 

infrastructure (for example, credit information 

systems) can be effective in improving transparency. 

Rigidly applying IFRS in LDC’s, including even the 

tailored “IFRS for SMEs,” could reduce rather than 

promote economic activity by these enterprises, and 

have negative implications for growth. 

D.3 Public Sector Interventions 

Governments can address market failures and incomplete 

markets that inhibit the provision of adequate financing 

for SMEs. Government measures to promote SMEs should 

be carefully focused, aiming at making markets work 

efficiently and at providing incentives for the private 

sector to assume an active role in SME finance. LDC governments 

are relatively more fiscally and capacity constrained, 

and the potential for direct public sector 

interventions is more limited, without donor assistance. 

State Banks 

For state-owned banks to play a positive and complementary 

role in the provision of credit to SMEs, the 

following have proven to be pre-requisites: 

• Legislation specifying clear mandates (to deflect 

political interference); 

• Sound governance structures with independent 

boards; 

• Clear performance criteria; 

• The obligation to price loans according to risk, and 

to generate a positive return; and 

• The ability to recruit and retain qualified staff. 

Apexes and Other Wholesale Funding 

Facilities 

Second-tier funding facilities, or apexes, can be set up 

to manage and on-lend funds to financial institutions, 

and to accelerate the growth of sound SME retail capacity 

in order to expand access to finance. Preconditions 

for successful application of this model include: 

• Define the apex mission and objectives clearly with a 

focus on building strong, sustainable, and responsible 

financial institutions and SMEs, not loan disbursements 

and outreach. 

• Focus on putting in place good governance, capable 

management, and an appropriate organizational


structure at the outset. The most effective apexes are 

those that are politically independent, with professional, 

effective boards and capable management. 

• Select the right institutions. Apexes need robust 

selection criteria and appraisal procedures and 

should focus not on the number of the financial institutions 

they fund, but rather the quality of those 

institutions. 

• Design the mission and instruments to fit with the 

market context. Apex loans should be tailored to the 

cash flow patterns and planning needs of financial 

institutions. In more mature markets, apexes might 

want to consider broadening their range of products 

to include quasi-equity, equity, or guarantees. 

• Manage an apex portfolio based on performance. To 

ensure good performance, apexes need to have good 

quality data on financial institution portfolios, 

review their progress on a regular basis, and be willing 

to act in the case of poor performance. 

• Provide adequate support for building the staff 

capacity of the apex itself. At an early stage of its 

development, funders of apexes (including governments) 

should ensure that the apex has the right 

team in place and is receiving technical support to 

build its own staff capacity. 

• Encourage apexes to crowd in commercial local 

funding by having this as one of their objectives. 

Funders of apexes, including governments, should 

encourage apexes to collaborate and share information 

with local banks and international commercial 

lenders. 92 

Partial Credit Guarantee Schemes 

Credit guarantee schemes are considered one of the 

more market-friendly types of interventions, as they 

can generate fewer distortions in the credit market 

than state banks and other direct public interventions, 

and may lead to better credit allocation. Key features of 

a well-designed scheme include: 

• Eligibility criteria: Guarantee schemes should target 

SMEs through ceilings on turnover, number of 

employees, and/or size of the loan. Restrictions on 

sectors or types of loans should generally be 

avoided. 

• Approval rules and procedures: Final approval or rejection 

of an application should occur within two 

weeks. 

• Coverage ratios: Coverage ratios should ensure sufficient 

protection against default risk while maintaining 

strong incentives for effective loan origination 

and monitoring. 

• Fees: Fees should be risk-based and contribute to the 

financial sustainability of the scheme. 

• Payment rules and procedures: Payment rules should take 

into account the effectiveness of the collateral and 

insolvency regimes. Schemes in LDCs should base 

payments on default events while ensuring incentives 

for effective debt collection. 

• Capacity building: PCGs can support the capacity of 

banks to provide SME finance and good practices. 

• Evaluation mechanism: Such a mechanism is necessary to 

measure outreach, additionality, and sustainability. 

• Supervision: Oversight is a key element to ensuring the 

soundness of operations. 

• Risk weighting for banks’ prudential requirements: A well 

designed and financially robust guarantee scheme 

should allow regulators to assign a lower risk weight 

to exposures covered by the guarantee. 

Government Procurement from SMEs 

The public sector can be a major buyer of goods and 

services from SMEs, and can more effectively link 

SMEs to supply chain finance and to factoring through 

that contractual and payment relationship. Electronic 

security and signature laws, and market facilitation 

platforms, can facilitate supply chain and factoring 

transactions with SMEs. 

It is also critical that governments pay SMEs promptly, 

in order to avoid otherwise viable SMEs incurring cash 

flow problems that can cause them to scale back or 

even close business activity. 

92 Extracted from Forster, Sarah and Duflos, Eric – “Re-assessing the Role of Apexes: Findings and Lessons Learned”, Forthcoming, CGAP, 

2011.


79 

SME Capacity, Creditworthiness 

Recommendations for public sector-supported initiatives 

to improve SME capacity and creditworthiness 

include: 

• Successful capacity building involves finding the 

right balance between adaptation and standardization 

of training content and delivery methods. The 

donor or development institution can ensure that 

the training is standardized enough to allow for 

scalability and consistent evaluation, while local 

trainers increase the effectiveness of training by tailoring 

it to the needs of specific segments (e.g., 

women entrepreneurs) and business contexts (e.g., 

conflict-affected areas). 

• It is more effective for donors or development institutions 

to help build the capacity of local training 

firms than it is to provide direct training to SMEs. 

Such a “wholesale” approach allows the intervention 

to achieve scale more effectively, can create 

commercially-viable local businesses, and creates 

incentives for the development of training 

approaches adapted to the audience and local 

environment. 

• Both public and private organizations have a role 

to play in capacity building. Public-private partnerships 

are one way to ensure that capacitydevelopment 

services are delivered by private 

actors, while still meeting broader societal objectives. 

It is also possible to provide training on a 

commercial or semi-commercial basis. The key to 

effective commercialization is to find a market 

gap for tailored interventions that meet the needs 

of clients. 

• Benchmarking and program evaluation pose challenges 

to SME support providers, yet ongoing 

monitoring and evaluation is critical to the effective 

use of interventions. Evaluation should consider 

client impact, institutional or partner 

performance, and market development. 

D4: Women and SME Finance 

The GPFI Women in Finance workstream covers SME 

finance. Relevant recommendations include: 

• Structure country diagnostics of demand and supply 

for SME finance to uncover gender gaps, drivers of 

access to finance for women, and the need for any 

tailored policy responses. 

• Build reliable gender-disaggregated data sources on 

women’s businesses and access to finance. 

• Develop a supportive legal and regulatory environment 

framework. Increasing women’s legal access to 

property improves access to collateral and control 

over financial services. 

• Strengthen the financial infrastructure. Expand 

financial infrastructure elements such as credit 

bureaus and collateral registries that can increase 

access for women and reduce the costs of 

borrowing. 

• Design effective government support mechanisms. 

Policymakers should review existing activities and 

programs on financial inclusion to ensure they 

include gender issues. 

• Consider appointing a national leader/champion for 

women-owned SMEs, someone who can coordinate 

with different stakeholders and ensure the agenda is 

a priority. 

• Consider incentives and specific goals for increased 

procurement by governments of goods and services 

from women-owned SMEs. 

• Build the capacity of financial institutions to better 

serve women entrepreneurs. Expand research into 

effective ways to combine access to finance and 

business training. 

D.5: Agrifinance and SMEs 

SMEs are significant actors in agricultural value chains, 

including in processing, distribution, and marketing 

activities. The parallel GPFI Agrifinance work agenda 

provides the following relevant recommendations:


• Include the agribusiness sector in diagnostics of 

demand and supply for SME finance. 

• Strengthen contract enforcement, to support the 

contract rights for creditors, farmers, and SMEs that 

underpin value chain structures and facilitate finance 

to all market participants. 

• Ensure that financial infrastructure is also relevant 

to agrifinance, for example that credit bureaus 

include value chain finance providers, that land 

tenure and land rights issues are addressed, and 

that agricultural equipment can be used as collateral 

through asset registries. 

• Coordinate policies intersecting both the financial 

and agriculture sectors, which is critical to facilitate 

access to finance for farmers and agricultural SMEs. 

• Governments should invest in the regular collection 

and dissemination of reliable data related to 

agricultural finance, including to underpin indexbased 

insurance. 

• Support capacity building – which is necessary to 

enhance the capabilities of staff in financial institutions 

to serve agricultural clients – and the financial 

literacy and management skills of agricultural SMEs 

and farmers.


81 

ANNEX I 

Access to Finance for SMEs in LDCs 

Access to finance remains a key constraint to SMEs 

development especially in emerging economies. 93 For 

example, data from World Bank Enterprise Surveys 

indicate that access to finance is disproportionately difficult 

for SMEs in Least Developed Countries (LDCs). 

As shown in Figure 1, 41 percent of SMEs in LDCs 

report access to finance as a major constraint to their 

growth and development, compared with 30 percent 

in middle-income countries (MICs) and only 15 percent 

in high-income countries. 94 

Figure 1 Access/Cost of Finance as a 

Major Constraint 

60 

50 

40 

30 

20 

10 

0 

15 

High Income 

30 

Middle Income 

41 

Least Developed 

Countries 

SMEs in their early stages of development rely on internal 

sources of funding, including the owner’s personal 

savings, retained earnings, or funding through the sale 

of assets. As firms starts expanding, external sources 

become more important and their availability can 

determine the firms’ growth possibilities. External 

finance is positively and significantly associated with 

productivity and conversely, while financing from 

internal funds, and other informal sources, is typically 

negatively associated with growth and firm performance. 

95 Figures 2 and 3 show how SMEs use different 

financing sources for working capital and fixed investments 

by country income groups. LDC SMEs show a 

higher dependence of internal financing compared 

with SMEs in more developed countries. Their use of 

bank financing 96 is significantly lower than high- and 

medium-income groups. Supplier credit, an arrangement 

between two businesses that allows delaying 

payment for the goods and services purchased, seems 

to be a substitute for bank financing to meet shortterm 

working capital needs. 

Bars indicate standard deviation across countries 

Source: World Bank Enterprise Surveys, 2006-2009 

Figure 2 SME Working Capital: 

financing sources 

100 

80 

60 

40 

20 

0 

10 7 6 

8 11 11 

15 

67 70 76 

High Income 

Internal Financing 

Middle Income 

Supplier Credit Financing 

Source: World Bank Enterprise Surveys 

12 

Bank Financing 

8 


Countries 

Other Financing 

15 

12 

9 

6 

3 

0 

15 8 

High Incom 

Bank 

Other 

93 See Beck, Demirgüç-Kunt and Maksimovic (2005) 

94 Numbers by income group are simple averages of all countries, with data available, that fall in the group. 

95 Beck, Demirgüç-Kunt, and Levine. (2005) 

96 See Beck, Demirgüç-Kunt and Maksimovic (2008)


Figure 3 SME Fixed Investments: financing sources 

120 

100 

25 

80 

20 

60 

15 

40 

20 

60 67 81 

10 

5 

0 

High Income 

Middle Income 


Countries 

0 

23 4 4 9 18 5 4 6 9 3 3 5 

High Income 

Middle Income 


Countries 

Internal Financing 



Trade Credit Financing 

Trade Credit Financing 

Equity, Sale of Stock 

Equity, Sale of Stock 



Source: World Bank Enterprise Surveys 

Figure 4 Financial Depth Indicators 

140 

120 

100 

80 

60 

40 

20 

0 

111 

15 

High Income 

45 

Middle Income 


Source: World Development Indicators 

25 


Countries 

140 

120 

100 

80 

60 

40 

20 

0 

103 

15 

High Income 

55 

Middle Income 

34 


Countries 


Figure 5 SME banking relationship 

100 

60 

80 

60 

40 

20 

0 

87 

High Income 

88 

Middle Income 

82 


Countries 

50 

40 

30 

20 

10 

0 

52 

High Income 

34 

Middle Income 

21 


Countries 



Source: World Bank Enterprise Surveys, 2006-2009


83 

Figure 6 Percentage of firms with Bank 

Loans/Line of Credit 

80 

70 

60 

50 

Figure 7 Leasing and factoring as 

percentage of GDP 

5 

4 

3 

40 

30 

2 

20 

10 

0 

63 52 58 34 47 21 

High Income 

Middle Income 


Countries 

1 

0 

4.7 1.7 2.1 1.6 0.1 0.5 

High Income 

Middle Income 


Countries 

Large 


Factoring 

Leasing 

Source: World Bank Enterprise Surveys, 2006-2009 

Source: White Clarke Global Leasing Report, Factors Chain International 

The SMEs financing pattern in LDCs can be explained by 

both access to finance constraints and deficiencies in the 

enabling environment. Traditional indicators of financial 

depth, such as private credit and bank deposits to 

GDP, indicate that LDCs have a lower level of financial 

60 67 81 

services compared with more developed countries. 

Although the percentage of SMEs with a banking relationship 

via deposit/checking accounts is similar for 

different income groups, access to credit is significantly 

lower in LDCs. As shown in Figure 5, only 21 

percent of SMEs in LDC have access to a bank loan, 

while the percentage with access is 34 percent in 

middle-income countries and 52 percent in highincome 

countries. 

Access to finance through bank loans not only decreases 

with the level of development but also tends to be concentrated 

among large borrowers. While commercial 

banks in developed countries have become better able 

to serve the needs of SMEs, banks in developing countries 

are often still constrained in their interest in and 

ability to expand SME lending. As Figure 6 shows, the 

concentration in terms of outreach is higher in LDCs 

than other income regions. In LDCs, only 21 percent of 

SMEs have a bank loan or line of credit. 97 

Other common sources of finance for SMEs include 

leasing and factoring. However, as Figure 7 shows, 

they are not yet well developed in LDCs. 

Equity financing is an important potential source of 

financing for SMEs, particularly in their early stages 

when cash flow is not yet regular. While some countries 

have established dedicated market segments or 

separate trading platforms exclusively for the SME 

sector, the performance, particularly in the lowerincome 

countries, has been unimpressive. For the 

majority of SMEs in emerging markets, access to local 

or international capital markets is not yet available. 98 

97 Results are in line with studies showing SME loans as a percentage of total bank loans decreasing in developing countries. See Beck, 

Demirgüç-Kunt and Martinez Peria (2008) 

98 OECD (2006)


Figure 8 Strength of legal rights and credit information infrastructure 

8.0 

7.0 

6.0 

5.0 

4.0 

3.0 

2.0 

1.0 

0 

6.7 

5.2 

4.7 

50 

40 

30 

20 

10 

0 

4.1 

3.1 

1.3 

High Income Middle Income Least Developed 

Countries 


High Income Middle Income Least Developed 

Countries 


Source: Doing Business 

The Enabling Environment 

for SME Finance 

Two “Doing Business” indices measure differences in 

the legal framework and credit reporting systems. The 

“Strength of Legal Rights” index measures the degree 

to which collateral and bankruptcy laws protect the 

rights of borrowers and lenders and thus facilitate 

lending by reducing the probability of default or 

reducing losses of lenders given default. Effective collateral 

regimes contribute to SME finance by reducing 

the risks and losses of lenders. The Strength of Legal 

Rights index measures the efficiency of collateral law 

(Figure 8), and is lower for LDCs. The “Depth of Credit 

Information” index measures rules and practices 

affecting the coverage, scope, and accessibility of credit 

information available through either a public credit 

registry or a private credit bureau. Well-functioning 

credit information systems reduce adverse selection 

and moral hazard, and can contribute to both an 

expansion of credit and a reduction in lending costs. 

Not surprisingly, as figure 8 shows, LDCs scores are 

lower than those in higher-income countries. Figure 8 

also shows substantial variation across countries in the 

same income groups, particularly in terms of credit 

information. 

The results are in line with other indicators showing 

that LDCs face a more severe set of challenges and constraints 

in providing enabling policy guides for SMEs. 

Indicators particularly relevant for financial access are 

the time taken and cost incurred in registering property 

and enforcing contracts. Studies show that countries 

with lower entry costs and lower costs of 

registering property have a larger SME sector in manufacturing. 

99 As shown in Figures 9 and 10, such costs 

are higher than average in LDCs. These indicators also 

show considerable variation across countries in the 

same income groups. 

The combination of costly and lengthy registration 

and enforcement processes, along with weak legal 

rights, acts to constrain SME lending in LDCs. SMEs 

are more likely to fail at acquiring new land or buildings 

compared to large and medium firms. Difficulties 

in acquiring property and securing titles and construction 

permits means that firms are less competitive 

and less able to expand production and 

employment. This can contribute to financing gaps, 

not only because such firms have lower asset values 

that can be used to secure loan contracts, but also 

because they are less productive, rendering them less 

creditworthy. Registering and transferring real 

99 Ayyagari, Beck and Demirgüç-Kunt (2007)


85 

Figure 9 Time and cost involved in registering property 

140 

12 

120 

100 

80 

60 

40 

20 

0 

36 

High Income 

57 

Middle Income 

95 


Countries 

10 

8 

6 

4 

2 

0 

4.5 

High Income 

5.7 

Middle Income 

8.0 


Countries 



Source: Doing Business Indicators 

Figure 10 Time and cost involved in enforcing contracts 

800 

700 

600 

80 

70 

60 

500 

50 

400 

300 

200 

100 

527 

545 

641 

40 

30 

20 

10 

21 

34 

51 

0 

High Income 

Middle Income 


Countries 

0 

High Income 

Middle Income 


Countries 



Source: Doing Business Indicators 

property, when property rights are not clearly defined, 

prevents firms from offering as collateral land, buildings, 

or movable property because of lack of clear 

titles or a missing system of information about liens 

against their property. At the same time, title transfer 

can be a complex process ranging from document collection 

and preparation to due diligence. In addition, 

in the absence of secure property rights, entrepreneurs 

are likely to forego or limit investment opportunities 

to fixed assets rather than intangible ones, since 

it is easier to secure returns from fixed assets. Sound 

property rights therefore also play a significant role in 

firms’ asset allocation and consequently growth, particularly 

of new firms. 100 

100 Claessens and Leaven (2002).


ANNEX II 

Abatement Curve Model 

A significant amount of research has gone into quantifying 

the SME credit gap and identifying barriers such 

as reliable data with which to assess the credit quality 

of borrowers, incomplete property registration, or 

banks’ cumbersome processes. 

Jointly with the IFC, Oliver Wyman developed the SME 

Finance Gap Abatement Curve methodology, aimed at 

establishing a quantitative link between credit market 

reform initiatives (and implied investment) and the 

benefits of reducing barriers to SMEs’ access to credit. It 

creates an objective framework to help policymakers 

decide where to focus limited resources to generate the 

greatest return on investment (e.g., employment, tax 

revenues). The methodology was applied to a sample of 

six countries: France, Kenya, Morocco, the Philippines, 

Turkey, and the United Kingdom. A key conclusion of 

relevance to policymakers is that the payback of any 

reform varies between countries: that is to say, each 

country has its own abatement curve. A common conclusion 

is that financial contribution to lending schemes 

(e.g., credit guarantees) is considerably less effective 

that addressing improvements in the underlying credit 

infrastructure (e.g., asset register, availability of financial 

information). 

i) Identifying the key drivers of the 

“addressable” 101 

financing gap: 

The model’s basic premise is that policymakers should 

focus on understanding the risk/return dynamics of 

SME lending and use this to steer the focus of their 

interventions. To the extent that such interventions run 

counter to basic free market principles, they tend to be 

unsustainable. With this in mind, policymakers should 

target the “addressable” financing gap with interventions 

that will change the state variables in such a way 

to minimize the distribution costs within the system, 

so that lenders maximize credit supply under reasonable 

return objectives. Three main cost components 

are the key drivers of an SME financing gap: 

Probability of Default (PD): How much of the gap is 

a result of the fact that lenders are unable to differentiate 

between high and low risk credits, and therefore 

suffer from adverse selection? Even in markets with a 

structurally high default rate, sophisticated lenders 

will be able to identify – and finance – higher quality 

SMEs: this effect can be quantified via the PD of the 

SME loan portfolio “on the books” of lenders. 

Loss Given Default (LGD): How much is due to the 

fact that lenders suffer from high loss rates in the event 

of borrower default, because of their inability to 

recover on collaterals held against the loans? The ability 

to take – and recover on – collateral as security 

against the debt is a significant risk management lever: 

again, it can be quantified via the LGD suffered by 

lenders to the SME sector. 

Cost base: How much is due to inefficiencies in operating 

cost structures, or in higher than necessary capital 

and funding costs? The cost base of lenders to the SME 

market can be aggregated and its three major compo- 

101 It should be noted, however, that this approach can only be applied to the “addressable” financing gap (i.e., the proportion of the total 

financing gap related to unnecessarily high distribution costs), and that neither this report nor the underlying model considers how best 

to tackle the “residual” financing gap.


87 

Figure 11 SME finance abatement curve 

6,000 

Probability of 

Default 

Loss Given Default 

Cost Base 

Financial institution capacity building 

Incremental tax revenues (USD $MM) 

5,000 

4,000 

3,000 

2,000 

1,000 

SME capacity building 

Financial institution 

capacity building 

Financial infrastructure: 

Institutional component 

Financial infrastructure: Related laws and regulations 

The steepness of the line indicates 

the size of the tax multiplier 

Financial infrastructure: Collateral registries 

Public support mechanisms 

Financial institution capacity building 

Financial infrastructure 

Public support 

mechanisms 

0 

2,000 4,000 6,000 8,000 10,000 12,000 

SME finance gap (USD $ MM) 

nents can be compared against best-practice benchmarks 

to determine the extent of unnecessary cost. 

ii) Quantifying the benefits of closing 

the “addressable” financing gap 

The model next uses multiplier effects to calculate the 

second order effects that closing the addressable financing 

gap will have in the economy (part of which will 

flow back to government in the form of taxes). Given an 

acceptable rate of return for the taxpayer, this approach 

provides a framework for governing investment in 

intervention policies to reduce the SME finance gap. 

The Oliver Wyman model applied this methodology on 

the same six markets examined previously. Given the 

uncertainties, the investigators aggregated the results of 

the sensitivity analysis into three categories: 

• Low (0-15%) – least important driver 

• Medium (15% - 50%): driver with significant, but 

not primary, impact on the gap 

• High (>50%): driver with the greatest likely impact 

on the gap 

Furthermore, the model only presents the results for 

the second order effects of closing the gap (i.e., the 

multiplier) at an aggregate level, as given below: 

Impact of Drivers on Financing Gap 

UK France Morocco Turkey Kenya Philippines 

Tax 

Multiplier 

(average) 

“Addressable” gap 13% 32% 45% 115% 82% 229% 

Drivers of gap 

Probability of default Medium Medium Low High Medium Medium 

Loss Given Default high High High Medium High High 

Cost base Low Low Medium Low Medium Low 

˜0.35 

˜0.17 

˜0.17 

Tax Multiplier 

˜0.13 ˜0.17 ˜0.27 ˜0.20 0.31 

˜0.45 ˜0.25


The model asserts that the interventions that will have 

the most impact are those that successfully address the 

barriers associated with the cost component that contributes 

most to the addressable financing gap. The mapping 

between cost components, barriers, and potential 

interventions is illustrated by the table overleaf. 

Taken in aggregate, these results provide guidance to 

policymakers on where to focus potential 

interventions: 

• Across all markets, Loss Given Default is almost consistently 

the cost component that has the biggest 

influence on the addressable financing gap (usually 

>50%). This suggests that policymakers should prioritize 

interventions that address the barriers that 

artificially increase lender losses in the event of 

default. These might include improvements to the 

legal environment surrounding corporate bankruptcy, 

the creation of a collateral registry, or the 

foundation of a credit guarantee scheme (See table ) 

• In most countries, Probability of Default typically 

contributes to a moderate portion (~20-25%) of the 

addressable gap. Therefore, a second priority for 

policymakers should be to tackle barriers such as 

asymmetric information, as well as both lender and 

SME skill levels. Interventions might include the 

establishment of a business registry and/or credit 

bureau, and programs to provide technical assistance 

to lenders or improve financial literacy among 

SMEs (Seetable). 

• The cost base of lenders contributes the least towards 

the addressable gap, with its influence varying 

between 5% and 25%, but tending toward the 

bottom of the range. This suggests that policymakers 

will have the least impact by intervening to lower 

the operational costs or funding costs (e.g., ringfenced 

funding schemes). 

• The second order effects of closing the financing gap 

appear to be positive. Policymakers should expect 

tax revenues from SMEs to increase at roughly twice 

the rate that lending increases, as a result of successful 

interventions. 

Interventions that address barriers associated with 

Probability of Default (i.e., asymmetric information, 

lack of skills on the part of both SME and lender) 

should have a disproportionate effect on tax revenues, 

due to the fact that lending is being skewed toward 

both more sustainable and more profitable SMEs. 

Those SMEs with a lower PD will typically have a 

higher operating margin than SMEs with a higher PD, 

which feeds through into both larger profits and tax 

take on aggregate. LGD and cost-related interventions 

do not have the same effect on the overall profitability 

of SMEs, and therefore do not result in such a big 

tax multiplier. 

We note that these conclusions do not hold true across 

every market. In particular, the relative contribution 

of Probability of Default to the addressable financing 

gap in Turkey and Morocco appears to be out of line 

with the other markets, as does the relative importance 

of the cost base in Morocco and Kenya. However, 

that still offers a lot of information in and of itself. By 

digging deeper in Morocco, Turkey, and Kenya, the 

authors argue that these results are largely explainable 

(the former because of the cyclical adjustment to PD 

that is made within the model; the latter because of 

the significant inefficiencies in the banking sector in 

these markets).


89 

ANNEX III 

World Bank General Principles for 

Credit Reporting 

General Principles for Credit 

Reporting 

The General Principles aim at the following public 

policy objectives for credit reporting systems: Credit 

reporting systems should effectively support the sound and fair 

extension of credit in an economy as the foundation for robust and 

competitive credit markets. To this end, credit reporting systems 

should be safe and efficient, and fully supportive of data subjects 

and consumer rights. 

Data 

General Principle 1: Credit reporting systems should 

have accurate, timely and sufficient data - including 

positive - collected on a systematic basis from all relevant 

and available sources, and should retain this 

information for a sufficient amount of time. 

Data Processing: Security and Efficiency 

General Principle 2: Credit reporting systems should 

have rigorous standards of security and reliability, and 

be efficient. 

Governance and Risk Management 

General Principle 3: The governance arrangements of 

credit reporting service providers and data providers 

should ensure accountability, transparency and effectiveness 

in managing the risks associated with the 

business and fair access to the information by users. 

Legal and Regulatory Environment 

General Principle 4: The overall legal and regulatory 

framework for credit reporting should be clear, predictable, 

non-discriminatory, proportionate and supportive 

of data subject and consumer rights. The legal and 

regulatory framework should include effective judicial 

or extrajudicial dispute resolution mechanisms. 

Cross-Border Data Flows 

General Principle 5: Cross-border credit data transfers 

should be facilitated where appropriate, provided that 

adequate requirements are in place. 

Roles of Key Players 

Role A: Data providers should report accurate, timely 

and complete data to credit reporting service providers, 

on an equitable basis. 

Role B: Other data sources, in particular public records 

agencies, should facilitate access to their databases to 

credit reporting service providers. 

Role C: Credit reporting service providers should ensure 

that data processing is secure and provide high quality 

and efficient services. All users having either a lending 

function or a supervisory role should be able to access 

these services under equitable conditions. 

Role D: Users should make proper use of the information 

available from credit reporting service providers. 

Role E: Data subjects should provide truthful and accurate 

information to data providers and other data sources. 

Role F: Authorities should promote a credit reporting 

system that is efficient and effective in satisfying the 

needs of the various participants, and supportive of 

consumer/data subject rights and of the development 

of a fair and competitive credit market.


Recommendations for Effective 

Oversight 

Recommendation A: Credit reporting systems should be 

subject to appropriate and effective regulation and 

oversight by a central bank, a financial supervisor, 

or other relevant authorities. It is important that 

one or more authorities exercise the function as 

primary overseer. 

Recommendation B: Central banks, financial supervisors, 

and other relevant authorities should have the 

powers and resources to carry out effectively their 

responsibilities in regulating and overseeing credit 

reporting systems. 

Recommendation C: Central banks, financial supervisors, 

and other relevant authorities should clearly define 

and disclose their regulatory and oversight objectives, 

roles, and major regulations and policies with respect 

to credit reporting systems. 

Recommendation D: Central banks, financial supervisors, 

and other relevant authorities should adopt, where relevant, 

the General Principles for credit reporting systems 

and related roles, and apply them consistently. 

Recommendation E: Central banks, financial supervisors, 

and other relevant authorities, both domestic and 

international, should cooperate with each other, as 

appropriate, in promoting the safety and efficiency of 

credit reporting systems.


91 

ANNEX IV 

Least Developed Countries 

Afghanistan 

Angola 

Bangladesh 

Benin 

Bhutan 

Burkina Faso 

Burundi 

Cambodia 

Central African Republic 

Chad 

Comoros 

Congo, Dem. Rep. 

Côte d’Ivoire 

Djibouti 

Equatorial Guinea 

Eritrea 

Ethiopia 

Gambia, The 

Ghana 

Guinea 

Guinea-Bissau 

Haiti 

Kenya 

Kiribati 

Korea, Dem. Rep. 

Kyrgyz Republic 

Lao PDR 

Lesotho 

Liberia 

Madagascar 

Malawi 

Maldives 

Mali 

Mauritania 

Mozambique 

Myanmar 

Nepal 

Niger 

Nigeria 

Pakistan 

Papua New Guinea 

rwanda 

Samoa 

São Tomé and Principe 

Senegal 

Sierra Leone 

Solomon Islands 

Somalia 

Sudan 

Tajikistan 

Tanzania 

Timor-Leste 

Togo 

Uganda 

Uzbekistan 

Vanuatu 

Vietnam 

Yemen, Rep. 

Zambia 

Zimbabwe 

OECD DAC Definition including countries with per capita GNI lower than $935 in 2007

92 

GLOBAL PARTNERSHIP FOR FINANCIAL INCLUSION 

ANNEX V 

Resources, References 

Key references 

Berger, A. N. and G. Udell. 2006. “A More Complete Conceptual Framework for SME Finance”. World Bank. Washington, DC. 

Available at http://siteresources.worldbank.org/INTFR/Resources/475459-1107891190953/661910-1108584820141/Financing_ 

Framework_berger_udell.pdf 

Claessens, S. , P. Honohan, L. Rojas-Suarez. 2009. “Policy Principles for Expanding Financial Access”. CGD. Washington, DC. 

Available at www.cgdev.org/files/1422882_file_Financial_Access_Task_Force_Report_FINAL.pdf 

OECD. 2006. “The SME Financing Gap, Volume I: Theory and Evidence”. Paris. OECD. Available at http://ec.europa.eu/enterprise/ 

newsroom/cf/document.cfm?action=display&doc_id=624&userservice_id=1 

Randhawa et al. 2010. “Toward Universal Access: Addressing the Global Challenge of Financial Inclusion”. Postcrisis Growth and 

Development: A Development Agenda for the G-20. World Bank. Washington, D.C. 

United Nations, “Building Inclusive Financial Sector for Development”, 2006, India, Mexico and South Africa examples based on 

public reports and publicly available information (see Reading List in Volume II for exact sources). 

Access to SME Finance in Least Developed Countries 

Ayyagari, M., T. Beck, and A. Demirgüç-Kunt,2007. “Small and Medium Enterprises across the Globe.” Small Business Economics 

29, 415-434 

Beck, T., A. Demirgüç-Kunt, and V. Maksimovic. 2005. “Financial and Legal Constraints to Firm Growth: Does Firm Size Matter?” 

Journal of Finance. 60(1, February): 137–177. 

Beck, T., A. Demirgüç-Kunt, and V. Maksimovic. 2008. Financing Patterns around the World: Are small firms different? Journal of 

Financial Economic 89, 467-87 

Beck,T., A. Demirgüç-Kunt and M.S. Martinez Peria. 2008. “Bank Financing for SMEs around the World: Drivers, Obstacles, 

Business Models, and Lending Practices.” The World Bank, Washington DC. 

Beck,T., A. Demirgüç-Kunt and M.S. Martinez Peria. 2010 “Bank Financing for SMEs: Evidence Across Countries and Bank 

Ownership Types.” Journal of Financial Services Research 

Claessens, Stijn and Laeven, Luc A., Financial Development, Property Rights, and Growth (November 2002). World Bank Policy 

Research Working Paper No. 2924. 

Beck, Thorsten, Asli Demirgüç-Kunt, and Ross Levine. 2005. “SMEs, Growth, and Poverty.” National Bureau of Economic Research 

Working Paper 11224, March. 

OECD. 2006. “The SME Financing Gap, Vol. I: Theory and Evidence.” Paris: OECD.] 

Role of Regulators 

Access through Innovation Sub-Group of the G20 Financial Inclusion Experts Group, 2010. Innovative Financial Inclusion 

Principles and Report on Innovative Financial Inclusion. 

Burgess, Robin and Rohini Pande, 2005. Do Rural Banks Matter? Evidence from the Indian Social Banking Experiment 

Demirgüç-Kunt Asli, Thorsten Beck, and Patrick Honohan, 2008. Finance for all? : Policies and pitfalls in expanding access. The 

World Bank.


93 

Basel II/III and SME finance 

Saurina, J. and C.Trucharte. 2003. “The Impact of Basel II on Lending to Small and Medium-Sized Firms: A Regulatory Policy 

Assessment based on the Spanish Credit Register”. Bank of Spain, Madrid. 

Jacobson, T., J. Linde, and K. Roszbach. 2004. ‘Credit Risk versus Capital Requirements under Basel II: Are SME Loans and Retail 

Credit Really Different?’ Journal of Financial Services Research, 28(1/2/3):43-75. 

Altman, E.I. and G. Sabato. 2005. “Effects of the new Basel Capital Accord on bank capital requirements for SMEs”. Journal of 

Financial Services Research 28, 15–42. 

Ayadi R, 2005, ‘The New Basel Capital Accord and SME Financing: SMEs and the New Rating Culture’, Centre for European Policy 

Studies, November 2005. Basel III: A global regulatory framework for more resilient banks and banking systems (December 2010) BIS 

Beck, Thorsten, A. Demirgüç-Kunt, and R. Levine. 2005. “Law and Firms’ Access to Finance”. American Law and Economics 

Review. 7 , 211-252. 

Gottschalk, Ricardo (2007), ‘Basel II implementation in developing countries and effects on SME development.’ Institute of 

Development Studies, (unpublished). 

Enabling Regulatory Frameworks for Non-Bank Financial Institutions 

IFC. 2005. “Leasing in Development: Guidelines for Emerging Economies”. Washington, DC. 

Klapper, Leora. 2005. “The Role of Factoring for Financing Small and Medium Enterprises.” World Bank Policy Research Working 

Paper 3593. World Bank. Washington, DC. 

IFC Board paper on Warehouse Receipt Financing and Supply Chain Financing, 09.09.2010. 

Trade Note No.29, World Bank Group, International Trade Department, Leora Klapper 2006 and updated 2009. 

World Bank Development Research Group, “Factoring around the World”, Leora Klapper, Feb 2009. 

Competition 

Beck T, de Jonghe O, Schepens G. 2011. “ Bank Competition and Stability: Cross-Country Heterogeneity”. 

European Banking Center Discussion Paper, No. 2011-019. Available at: http://arno.uvt.nl/show.cgi?fid=115231 

Bond et al (2008) available at: http://www.philadelphiafed.org/research-and-data/publications/working-papers/2008/wp08-24.pdf 

De la Torre, Augusto, M. Martínez Pería, and S. Schmukler. 2009. “Drivers and Obstacles to Banking SMEs: The Role of Competition 

and the Institutional Framework”. CESifo Working Paper Series CESifo Working Paper No. 2651, CESifo Group Munich. 

Cetorelli, N. (2004). Real Effects of Bank Competition. Journal of Money, Credit, and Banking 36 (3): 543-558 

Brown, M. and Rueda Maurer, M. (2005). Bank Ownership, Bank Competition, and Credit Access: Firm-Level Evidence from 

Transition Countries. Mimeo. Swiss National Bank. 

Santiago Carbó-Valverde & Francisco Rodríguez-Fernández & Gregory F. Udell, 2009. “Bank Market Power and SME Financing 

Constraints,” Review of Finance, Oxford University Press for European Finance Association, vol. 13(2), pages 309-340. 

S. Mercieca, L. Schaeck, S. Wolfe “Bank Market Structure, Competition, and SME Financing Relationships in European Regions” 

Journal of Financial Services Research, Vol. 36, pp. 137-155 

Vives (2010) available at: http://www.voxeu.org/index.php?q=node/5534 

World Bank, 2011, MENA Financial Sector Flagship 

Secured Transactions 

Alvarez de la Campa, 2010, ‘Increasing Access to Credit through Reforming Secured Transactions in the MENA Region’, June 2010. 

IFC, “Secured Transactions Systems and Collateral Registries”, January 2010; 

EBRD, Dahan, Simpson, 2008. “Secured Transactions Reform and Access to Credit”; 

The World Bank Principles and Guidelines for Insolvency and Creditor Rights Systems, (revised 2005);

94 


Welsh (IRIS, Center for Institutional Reform and the Informal Sector, University of Maryland), 2003. “Secured Transactions Law: 

Best Practices & Policy Options”; 

Insolvency Regimes 

Berkowitz, J. and M. White. “Bankruptcy and Small Firms’ Access to Credit.” 35 RAND Journal of Economics, (2004) 68-84 at p. 81. 

Djankov, Simeon; & McLiesh, Caralee; Shleifer, Andrei. 2005. “Private Credit in 129 Countries,” NBER Working Papers 11078, 

National Bureau of Economic Research, Inc. 

World Bank Principles for Effective Insolvency and Creditor Rights Systems (World Bank). 

UNCITRAL Legislative Guide on Insolvency Law (UNCITRAL). 

John Armour and Douglas Cumming, “Bankruptcy Law and Entrepreneurship” (2008) American Law and Economics Review 

(Oxford: Oxford University Press), 303. 

Uttamchandani, Mahesh, ‘No Way Out: The Lack of Efficient Exit Regimes in MENA’, paper prepared for the MENA Finance 

Flagship, World Bank. 

Uttamchandani, M., Menezes, A., 2010. “Freedom to Fail: Why Small Business Insolvency Regimes are Critical for Emerging 

Markets”, International Corporate Rescue, No. 4, Vol. 7. Chase Cambria. 

Credit Information Systems 

Love, I. and N. Mylenko. 2003. “Credit Reporting and Financing Constraints”. Washington, D.C.: World Bank. 

Madeddu Oscar, 2010, ‘Status of Information Sharing and Credit Reporting Infrastructure’, paper prepared for the MENA Finance 

Flagship, World Bank. 

2011, “General Principles for Credit Reporting”- consultative report, The World Bank. http://siteresources.worldbank.org/ 

FINANCIALSECTOR/Resources/GeneralPrinciplesforCreditReporting(final).pdf 

Payment Systems 

World Bank 2008, Balancing Cooperation and Competition in Retail Payment Systems. 

World Bank, 2009, Global Payment System Survey. 

World Bank, 2009, Measuring Payment System Development. 

World Bank and BIS 2007, General Principles for International Remittances. 

BIS 2006, General Guidance for National Payment Systems Development. 

Equity Investment 

Beck, Thorsten, and R. Levine. 2004. “Stock Markets, Banks and Growth: Panel Evidence”. Journal of Banking and Finance. 28 (3), 

423-442. 

Belke, A.; R. Fehn, and N. Foster, 2003, “Does Venture Capital Investment Spur Employment Growth?” CESIFO Working Paper 930 

Kortum, S. and J. Lerner, 2000, “Assessing the impact of venture capital on innovation” Rand Journal of Economics 31, 4, 674-692. 

Mako, William, 2010, ‘Investment Funds’, paper prepared for the MENA Finance Flagship, World Bank 

Mako, William, 2009, ‘Mobilizing Long-term Finance: Next Steps in Egypt’s Capital Market Development’ World Bank 

Pearce, Douglas; Nasr Sahar. 2011. “Small and Medium Enterprise Finance in the Middle East and North Africa”. Unpublished draft. 

Rainer Fehn & Thomas Fuchs, 2003. “Capital Market Institutions and Venture Capital: Do They Affect Unemployment and Labour 

Demand?,” CESifo Working Paper Series 898, CESifo Group Munich 

The Economic Impact of Venture Capital and Private Equity in South Africa, 2009 Southern African Venture Capital and Private 

Equity Association, Development Bank of Southern Africa


95 

State Banks, other Retail-level interventions 

Dinç, Serdar. 2005. “Politicians and Banks: Political Influences on Government-Owned Banks in Emerging Countries.” Journal of 

Financial Economics. Vol. 77: 453-479. Available at http://info.worldbank.org/etools/docs/library/156393/stateowned2004/pdf/ 

dinc.pdf 

Farazi, Subika, Erik Feyen, Roberto Rocha. 2011. “Bank Ownership and Performance in the Middle East and North Africa Region.” 

Policy Research Working Paper Series 5620. The World Bank, Washington DC 

Micco, A., U. Panizza, M. Yañez. 2005. “Bank Ownership and Performance: Does Politics Matter?”. Working Papers N° 356. 

Central Bank of Chile. 

Available at http://www.bcentral.cl/estudios/documentos-trabajo/pdf/dtbc356.pdf 

Rudolph, Heinz.2009. “State Financial Institutions: Mandates Governance and Beyond.” World Bank Policy Research Working 

Papers 5141. The World Bank. Washington, DC. 

Yaron, Jacob. 2004. “State-Owned Development Finance Institutions: Background, Political Economy and Performance 

Assessment.” Seminar paper. Inter-American Development Bank. Washington, DC. Available at http://www.iadb.org/res/publications/pubfiles/pubS-492.pdf 

Apexes, other Wholesale-level funding mechanisms 

CGAP Brief: ‘Focus on Apexes’, 2009 (http://www.cgap.org/p/site/c/template.rc/1.26.10511/ 

CGAP Brief: “Apexes: An Important Source of Local Funding”, March 2010 

Duflos, Eric & El Zoghbi, Mayada, 2010 “Apexes: An Important Source of Local Funding”, (http://www.cgap.org/p/site/c/template.rc/1.9.43025/) 

Forster, Sarah and Duflos, Eric, 2011 “Reassessing the Role of Apexes: Findings and Lessons Learned”, CGAP 

Levy, Fred, 2001, ‘Apex Institutions in Microfinance’; CGAP Occasional Paper, No. 6. 

Pearce, Douglas, 2002, ‘Lessons Learned from the World Bank -supported Apex Facility in Bosnia’ 

Vega, Claudio Gonzalez, 1998, ‘Microfinance Apex Mechanisms: Review of the evidence and policy recommendations’. 

Partial Credit Guarantee Schemes 

Beck,T., A De la Torre, 2006. “The Basic Analytics of Access to Financial Services”, World Bank Policy Research Working Paper No. 4026 

Beck, T., L. F. Klapper, J. Carlos Mendoza. 2008. “The Typology of Partial Credit Guarantee Funds Around the World”. World 

Bank. Available at: http://siteresources.worldbank.org/INTFR/Resources/Beck-Klapper-Mendoza.pdf 

Rocha, R., Y. Saadani, Zs. Arvai. 2010. “Assessing Credit Guarantee Schemes in the Middle East and North Africa Region”. World 

Bank. Available at: http://blogs.worldbank.org/files/allaboutfinance/MENA%20Flagship%20 Credit%20Guarantee%20 

Schemes%20Final.pdf 

Benavente, José Miguel, Alexander Galetovic, and Ricardo Sanhueza, 2006, Fogape: An economic analysis, Working Paper 222 

University of Chile Santiago, Chile; available at http://www.redegarantias.com/boletines/archivo.asp?idarchivo=316 

De la Torre, Augusto, Juan Carlos Gozzi, and Sergio Schmukler. 2007. Innovative experiences in Access to Finance: Market Friendly 

Roles for the Visible Hand? Policy Research Working Paper No 4326. August. The World Bank. Washington DC. Available at 

http://www-wds.worldbank.org/servlet/WDSContentServer/WDSP/IB/2007/08/17/ 000158349_20070817134420/Rendered/ 

PDF/wps4326.pdf 

Government Procurement from SMEs 

Evaluation of SMEs’ access to public procurement markets in the EU. 2010 GHK 

The Impact of the Global Crisis on SME and Entrepreneurship Financing and Policy Responses. 2009. OECD

96 


SME Capacity, Creditworthiness 

“Business Development Services for SMEs: Preliminary Guidelines for Donor Intervention,” Summary of the Report to the Donor 

Committee for Small Enterprise Development (January 1998). 

“Promoting SMEs for Development: The Enabling Environment and Trade and Investment Capacity Building,” DAC Journal, Vol. 5, 

No. 2 (2004). 

Business Development Services for SMEs: Preliminary Guidelines for Donor Intervention,” Summary of the Report to the Donor 

Committee for Small Enterprise Development (January 1998). 

Making Big Things Happen for Small Businesses: Annual Report 2011, Business Partners. Retrieved July 7, 2011 from http://www.businesspartners.co.za/Finresults/AR2011.pdf. 

Meghana Ayyagari, Asli Demirguc-Kunt and Vojislav Maksimovic, “Small vs. Young Firms across the World: Contribution to 

Employment, Job Creation, and Growth,” The World Bank Development Research Group (April 2011). 

Michael Klein, “Promoting Small and Medium Enterprises: Their Importance and the Role of Development Finance Institutions in 

Supporting Them,” The Atrium Dialogues, DEG KfW Bankengruppe (November 2010). 

Miriam Bruhn, Dean Karlan, and Antoinette Schoar, “Returns to Management Consulting for Micro, Small and Medium Size 

Enterprises in Mexico,” Innovations for Poverty Action. 

Nicholas Bloom and John Van Reenen, “Why do Management Practices Differ across Firms and Countries?” Journal of Economic 

Perspectives, Vol. 24, No. 1 (2010). 

Nicholas Bloom, Benn Eifert, Aprajit Mahajan, David McKenzie and John Roberts, “Does Management Matter? Evidence from 

India,” The World Bank Development Research Group (February 2011). 

Tom Gibson and Hugh Stevenson, “High-Impact Gazelles: Should They Be a Major Focus of SME Development?” (April 2011) 

Why Support SMEs?” International Finance Corporation, World Bank Group (2010). 

Women and SME Finance 

Chamlou, 2008, The Environment for Women’s Entrepreneurship in the Middle East and North Africa Region World Bank, 

Washington, D.C. 

Ellis. et al, 2007, Gender and Economic Growth in Kenya—Unleashing the Power of Women, World Bank, Washington, D.C. 

Ellis. et al. 2007, Gender and Economic Growth in Tanzania: Creating Opportunities for Women World Bank, Washington, D.C. 

Ellis. et al., 2005, Gender and Economic Growth in Uganda—Unleashing the Power of Women.(World Bank, Washington, D.C. 

Millennium Development Goals Global Monitoring Report, 2007, World Bank, Washington, D.C. 

Simavi et al. 2010, Gender Dimensions of Investment Climate Reform, A Guide for Policymakers and Practitioners, World Bank, 

Washington, D.C. 

Agrifinance and SMEs 

African Agricultural Finance - Information sharing on the African voice within the G20 GIZ on behalf of BMZ: Federal Ministry 

for Economic Cooperation and Development. Technical Roundtable, Kampala, March 2011 

Renate Kloeppinger-Todd and Manohar Sharma (editors) 2010, Innovations in Rural and Agriculture Finance. Focus 18, 2010. 

International Food Policy Research Institute and the World Bank. 

Rita Butzer, Yair Mundlak and Donald F. Larson 2010, Measures of Fixed Capital in Agriculture. Policy Research Working Paper; 

World Bank, Development Research Group Agriculture and Rural Development Team, 2010. 

Rural Finance Innovations - Topics and Case Studies. The World Bank Agriculture And Rural Development Department, Report 

No. 32726-GLB. April 2005


97

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